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(4) Commitments & Contingencies

9 Months Ended

Sep. 28, 2019

Commitments

Leases

The Company has two real estate leases—one expiring in February 2021 and one with a 12 month duration with options to extend additional years. Since the latter is not reasonably certain that any options will be exercised, it has not been recorded on the balance sheet in accordance with the accounting policy elected in Note 2. CPS also has a few other leases for equipment which are minor in nature and are generally short-term in duration. None of these have been capitalized.

The lease expiring in 2021 (the “Norton facility lease’) is included as a right-of-use lease asset and corresponding lease liability on the balance sheet. This asset and liability was recognized on December 30, 2018 based on the present value of remaining lease payments over the remaining lease term using the Company’s incremental borrowing rate at date of adoption. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating Leases

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense is allocated between Cost of Product Sales and Selling, General and Administrative Expense in the income statement

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s capitalized operating leases as of September 28, 2019

(Dollars in Thousands)		Sept 28, 2019
Maturity of capitalized lease liabilities		Lease payments
2019 (remaining)	$	38
2020		152
2021		26
Total undiscounted operating lease payments	$	216
Less: Imputed interest		(9)
Present value of operating lease liability	$	207

Balance Sheet Classification
Current lease liability	$	148
Long-term lease liability		59
Total operating lease liability	$	207
Other Information
Weighted-average remaining lease term for capitalized operating leases		17 months
Weighted-average discount rate for capitalized operating leases		6.5%

Cash Flows

An initial right-of-use asset of $310 thousand was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on December 30, 2018. Cash paid for the amounts included in the present value of operating lease liabilities was $114 thousand during the first nine months of 2019 and is included in operating cash flows.

Operating Lease Costs

Operating lease cost was $114 thousand during the first nine months of 2019. This cost is related to its long-term operating lease. All other short-term leases were immaterial.

Finance Leases

The company does not have any finance leases.

Loss contingency

The Company manufactures baseplates for power module manufacturers. Most baseplates manufactured by CPS require a nickel coating be applied to the baseplate (“Ni plating”). CPS warranties its baseplates meet the Ni plating specifications required by our customers, and flows this requirement to its Ni plating vendors.

On January 24, 2018 the Company received a “Claim and Non-Conformance Notification” from one of its European customers relating to the Ni plating on our baseplates. Upon investigation, it was determined that one employee of the Ni plating vendor used by CPS had deviated from the prescribed work instruction for Ni plating from mid-September 2017 until mid-January 2018. The Company's Ni plating vendor acknowledged this violation and worked with the customer to resolve the problem.

On April 11, 2018 the Company received a “Follow-up Claim and Non-Conformance Notification” from the European customer. The customer estimated the total value of the claim to be $1.0 million “as of today”, and reserves the right to claim additional damages in the future.

The Company informed its insurer of this claim and the Ni plating vendor did the same with its insurer. No amounts for damages had been recorded in the financial statements as management believed that it was not possible at the time to quantify the potential impact, if any, to the Company.

On July 9, 2019, the Company received confirmation from its customer accepting the settlement offer of the Company’s insurer. The settlement is covered by the Company’s insurance policy and the Company does not expect to incur any losses as part of the settlement.