CORE MOLDING TECHNOLOGIES INC (CMT) FY 2021 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements under this caption of this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements involve known and unknown risks and are subject to uncertainties and factors relating to Core Molding Technologies' operations and business environment, all of which are difficult to predict and many of which are beyond Core Molding Technologies' control. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expect,” “intend,” “plans,” “projects,” “believes,” “estimates,” “confident” and similar expressions are used to identify these forward-looking statements. These uncertainties and factors could cause Core Molding Technologies' actual results to differ materially from those matters expressed in or implied by such forward-looking statements.

Core Molding Technologies believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this Annual Report on Form 10-K: business conditions in the plastics, transportation, power sports, utilities and commercial product industries (including changes in demand for truck production); federal and state regulations (including engine emission regulations); general economic, social, regulatory (including foreign trade policy) and political environments in the countries in which Core Molding Technologies operates; the adverse impact of coronavirus (COVID-19) global pandemic on our business, results of operations, financial position, liquidity or cash flow, as well as impact on customers and supply chains; safety and security conditions in Mexico and Canada; fluctuations in foreign currency exchange rates; dependence upon certain major customers as the primary source of Core Molding Technologies’ sales revenues; efforts of Core Molding Technologies to expand its customer base; the ability to develop new and innovative products and to diversify markets, materials and processes and increase operational enhancements; ability to accurately quote and execute manufacturing processes for new business; the actions of competitors, customers, and suppliers; failure of Core Molding Technologies’ suppliers to perform their obligations; the availability of raw materials; inflationary pressures; new technologies; regulatory matters; labor relations; labor availability; a work stoppage or labor disruption at one of our union locations or one of our customer or supplier locations; the loss or inability of Core Molding Technologies to attract and retain key personnel; the Company's ability to successfully identify, evaluate and manage potential acquisitions and to benefit from and properly integrate any completed acquisitions; federal, state and local environmental laws and regulations; the availability of sufficient capital; the ability of Core Molding Technologies to provide on-time delivery to customers, which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees and other customer charges; risk of cancellation or rescheduling of orders; management’s decision to pursue new products or businesses which involve additional costs, risks or capital expenditures; inadequate insurance coverage to protect against potential hazards; equipment and machinery failure; product liability and warranty claims; and other risks identified from time to time in Core Molding Technologies’ other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of this Annual Report on Form 10-K.

DESCRIPTION OF THE COMPANY

Core Molding Technologies and its subsidiaries operate in the engineered materials market as one operating segment as a molder of thermoplastic and thermoset structural products. During the year ended December 31, 2021 the Company's operating segment consisted of one component reporting unit, which changed from two component reporting units in prior periods. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, automobiles, power sports, construction and agriculture, building products and other commercial markets. Core Molding Technologies has its headquarters in Columbus, Ohio, and operates seven production facilities in three countries, United States, Canada and Mexico. On November 5, 2020, the Company announced it will close the manufacturing facility located in Batavia, Ohio and completed the closure in the fourth quarter of 2021.

BUSINESS OVERVIEW

General

The Company’s business and operating results are directly affected by changes in overall customer demand, operational costs, and performance and leverage of our fixed cost and selling, general and administrative ("SG&A") infrastructure.

Product sales fluctuate in response to several factors including many that are beyond the Company’s control, such as general economic conditions, interest rates, government regulations, consumer spending, labor availability, and our

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customers’ production rates and inventory levels. Product sales consist of demand from customers in many different markets with different levels of cyclicality and seasonality. The Company's largest market, North American truck, which is highly cyclical, accounted for 41%, 43%, and 58% of the Company’s product revenue for the years ended December 31, 2021, 2020, and 2019, respectively.

Operating performance is dependent on the Company’s ability to manage changes in input costs for items such as raw materials, labor, and overhead operating costs. The Company has certain contractual commitments that restrict its ability to pass through changes in input costs to certain customers. As a result, during periods of significant increases or decreases in input costs operating results may be impacted.

Performance is also affected by manufacturing efficiencies, including items such as on time delivery, quality, scrap, and productivity. Market factors of supply and demand can impact operating costs. In periods of rapid increases or decreases in customer demand, the Company is required to ramp operational activity up or down quickly, which may impact manufacturing efficiencies more than in periods of steady demand.

Operating performance is also dependent on the Company’s ability to effectively launch new customer programs, which are typically extremely complex in nature. The start of production of a new program is the result of a process of developing new molds and assembly equipment, validation testing, manufacturing process design, development and testing, along with training and often hiring employees. Meeting the targeted levels of manufacturing efficiency for new programs usually occurs over time as the Company gains experience with new tools and processes. Therefore, during a new program launch period, start-up costs and inefficiencies can affect operating results.

Results of 2021 Overview

Operating income increased to $11,068,000 for the year ended December 31, 2021 compared to $10,390,000 for the year ended December 31, 2020 on a product sales increase of 35%. Higher demand from our customers and successful launch of new customer programs were the primary drivers of the sales increase. The increase in operating income was largely due to the increase in sales and higher fixed cost leverage offset by raw material cost inflation and closure costs related to the Company's Batavia, Ohio manufacturing facility.

The Company's product sales for the year ended December 31, 2021 compared to the same period of 2020 by market are as follows (in thousands):

For the year ended December 31, 2021, the Company experienced larger than normal increases in raw material costs totaling $28,172,000 and customer demand disruptions due to customer supply chain challenges. The Company was able to recoup approximately $19,080,000 in material cost increases from customers, which is included within product sales. Due to customer contractual limitations, the Company was not able to recoup all of its raw material price increases during the year ended December 31, 2021.

The Company incurred operating losses, including closure costs, for the year ended December 31, 2021 of $2,581,000, for the closure of its Batavia, Ohio facility. The Company initially planned to complete the closure of the facility in the first half of 2021 but was delayed to ensure an orderly transition of customer products to other Core facilities as well as other third-party suppliers. The Company completed the closure of the facility in the fourth quarter of 2021 and does not anticipate any additional costs of shuttering the facility.

For the year ended December 31, 2021, the Company recorded net income of $4,671,000 or $0.55 per basic and diluted share, compared with net income of $8,165,000, or $0.98 per basic and diluted share for the year ended December 31, 2020.

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Forward Looking

Looking forward, based on customers' forecasts and anticipated new program launches, the Company expects sales for 2022 to increase compared to 2021. Customers in the medium and heavy-duty truck, power sports, utilities and industrial markets are forecasting higher demand in 2022. The Company launched new programs in the power sports and utilities markets in 2021 and expects to launch new programs in several different markets in 2022. We expect ongoing customer supply chain disruptions may continue which will cause sporadic reductions to customers' forecasts.

The Company anticipates most raw material costs to remain elevated in 2022, including thermoset resins and fiberglass. The Company did experience a decrease in commodity resin prices in the fourth quarter of 2021 and based on industry forecasts for commodity resins, the Company anticipates additional decreases in commodity resins in 2022. The Company will continue to pursue customer price increases to recover our higher raw material costs where such increases will not have a significant negative impact on demand. In the first quarter of 2022, the Company successfully negotiated surcharge increases with customers without contractual raw material adjustment obligations in order to recover higher raw material costs, which should reduce the amount of unrecovered raw material cost increases in 2022.

Labor markets in all Company locations have tightened in 2021 and the Company anticipates the markets to remain tight. The Company has had to raise wages and create other solutions in order to hire and retain workers. If labor costs continue to increase, the Company will continue to pursue customer price increases, where such increases will not have a significant negative impact on demand.

2021 Compared to 2020

Net sales for the years ended December 31, 2021 and 2020 totaled $307,483,000 and $222,356,000, respectively. Included in total sales were tooling project sales of $23,458,000 and $11,776,000 for the years ended December 31, 2021 and 2020, respectively. These sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis. Product sales, excluding tooling project sales, for the year ended December 31, 2021 were $284,025,000 compared to $210,580,000 for the same period in 2020. The increase in sales is primarily the result of higher demand from the heavy-duty truck, power sports, and consumer product markets and the recoupment of raw material inflation costs.

Gross margin was approximately 13.4% of sales for the year ended December 31, 2021, compared with 15.5% for the year ended December 31, 2020. The gross margin percentage decrease was due to net changes in selling price and raw material cost of 4.8% offset by favorable product mix and production efficiencies of 0.5% and higher fixed cost leverage of 2.3%.

Included in selling, general and administrative (“SG&A”) for the year ended December 31, 2021 are closure costs of $2,027,000 related to the manufacturing facility in Batavia, Ohio. Excluding closing costs, remaining SG&A costs for the year ended December 31, 2021 totaled $28,249,000, compared to $24,084,000 in 2020. The increase in SG&A expense primarily resulted from higher labor and benefit costs of $1,355,000, insurance costs of $505,000 and higher travel costs of $233,000. SG&A expenses for the year ended December 31, 2020 were favorably impacted from COVID-19 related government subsidies of $1,416,000, which the Company did not receive in 2021.

Interest expense totaled $2,311,000 for the year ended December 31, 2021, compared to interest expense of $5,923,000 for the year ended December 31, 2020. The decrease in interest expense was primarily due to incurring for the year ended December 31, 2020 a loss on termination of interest rate swaps of $1,253,000 and a one-time expense related to the deferred loan costs for the debt refinancing of $583,000. As a result of restructuring of the Company's debt in 2020, the Company has lower average outstanding debt balance and lower interest rates during the year ended 2021, when compared to 2020.

Income tax expense was approximately $4,248,000 of total income before income taxes for the year ended December 31, 2021. The Company’s income tax expense for the year ended December 31, 2021 includes statutory foreign tax expense from foreign taxable income offset by tax benefits, net of valuation allowances, for tax losses in the United States. Income tax benefit for the year ended December 31, 2020 was $3,618,000 and includes net valuation allowance change of $2,074,000 and a rate benefit of $3,205,000 based on losses being carried back to years where the Company paid tax at 34% compared to the valuation of the losses being recorded at the 21% current U.S. statutory tax rate.

The Company recorded net income for 2021 of $4,671,000 or $0.55 per basic and diluted share, compared with net income of $8,165,000 or $0.98 per basic and diluted share for 2020.

Comprehensive income totaled $4,371,000 in 2021, compared to a comprehensive income of $8,170,000 in 2020. The decrease was primarily related to a decrease in net income of $3,494,000 and a net decrease in hedging activities of $191,000.

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2020 Compared to 2019

Net sales for the years ended December 31, 2020 and 2019 totaled $222,356,000 and $284,290,000, respectively. Included in total sales were tooling project sales of $11,776,000 and $15,303,000 for the years ended December 31, 2020 and 2019, respectively. These sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period -to-period basis. Product sales, excluding tooling project sales, for the year ended December 31, 2020 were $210,580,000 compared to $268,987,000 for the same period in 2019. This decrease in sales is primarily the result of lower cyclical demand from truck customers as well as lower demand from most all customers as a result of COVID-19, offset by the increase in demand from customers in building products industry.

Gross margin was approximately 15.5% of sales for the year ended December 31, 2020, compared with 7.6% for the year ended December 31, 2019. The gross margin increase, as a percent of sales, was due to favorable product mix and production efficiencies of 8.4% and changes in selling price and material costs of 1.0%, offset by lower leverage of fixed costs of 1.5%.

Selling, general and administrative expense (“SG&A”) totaled $24,084,000 in 2020, compared to $28,934,000 in 2019. The decrease in SG&A expense primarily resulted from lower professional and outside services of $2,023,000, government subsides received in 2020 enacted as a result of COVID-19 of $1,416,000, and lower travel costs of $783,000.

The Company incurred a goodwill impairment of $4,100,000 during the year ended December 31, 2019. In 2019, the Company incurred lower profit margins caused by selling price decreases that the Company had not been able to fully offset with material cost reductions.

Interest expense totaled $5,923,000 for the year ended December 31, 2020, compared to interest expense of $4,144,000 for the year ended December 31, 2019. The increase in interest expense was primarily due to a loss on termination of interest rate swaps of $1,253,000 and a one-time expense related to the deferred loan costs for the debt refinancing of $583,000, offset by lower average outstanding debt in 2020.

Income tax benefit was approximately 80% of total income before income taxes in 2020 and 2% of total loss in 2019. The Company’s effective tax rate reflects the effects of taxable income and taxable losses being generated in tax jurisdictions with different tax rates, and in 2020 a net valuation allowance charge at 34% compared to the valuation of the losses being recorded at 21% current U.S. statutory tax rate.

The Company recorded net income for 2020 of $8,165,000 or $0.98 per basic and diluted share, compared with net loss of $15,223,000 or $(1.94) per basic and diluted share for 2019.

Comprehensive income totaled $8,170,000 in 2020, compared to a comprehensive loss of $15,970,000 in 2019. The increase was primarily related to higher net income of $23,388,000 and a change in net actuarial adjustments of $1,982,000 for other post- retirement benefit obligations.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The Company’s primary sources of funds have been cash generated from operating activities and borrowings from third parties. Primary cash requirements are for operating expenses, capital expenditures, repayments of debt, and acquisitions. The Company from time to time will enter into foreign exchange contracts and interest rate swaps to mitigate risk of foreign exchange and interest rate volatility. As of December 31, 2021 and 2020, the Company had no outstanding foreign exchange contracts and no outstanding interest rate swaps.

Cash provided by operating activities totaled $12,546,000 for the year ended December 31, 2021. Net income of $4,671,000 positively impacted operating cash flows. Non-cash deductions included in net income from depreciation and amortization and share based compensation amounted to $11,616,000 and $1,886,000, respectively. An increase in working capital resulted in a decrease in cash provided of $5,895,000. The decrease in cash from working capital was primarily related to a decrease in accounts receivable, inventory and other current assets, offset by an increase in accounts payable and accrued and other liabilities.

Cash used in investing activities totaled $11,415,000 for the year ended December 31, 2021, primarily related to purchases of property, plant and equipment for additional capacity, new programs and equipment improvements at the Company’s production facilities. Included in the $11,415,000 is expenditures of $4,855,000 on the DLFT capacity expansion in

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Matamoros, Mexico. The Company anticipates spending approximately $14,800,000, including approximately $2,200,000 to complete its DLFT expansion during 2022 on property, plant and equipment purchases for all of the Company's operations. The Company plans on using cash from operations, its revolving line of credit or additional term loans to finance capital expenditures. At December 31, 2021, purchase commitments for capital expenditures in progress were approximately $5,315,000.

Cash received from financing activities totaled $884,000 for the year ended December 31, 2021. Cash activity primarily consisted of net borrowings of revolving loans of $4,004,000, offset by repayments of principal on outstanding term loans of $3,022,000.

At December 31, 2021, the Company had $6,146,000 of cash on hand and an available revolving line of credit of $24,337,000. If a material adverse change in the financial position of the Company should occur, or if actual sales or expenses are substantially different than what has been forecasted, the Company's liquidity and ability to obtain further financing to fund future operating and capital requirements could be negatively impacted.

Management believes cash on hand, cash flow from operating activities and available borrowings under the Company’s credit agreement will be sufficient to meet the Company’s current liquidity needs.

Term Loans

Wells Fargo Term Loans

On October 27, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, lead arranger and book runner, and the lenders party thereto (the “Lenders”). Pursuant to the terms of the Credit Agreement, the Lenders made available to the Company secured term loans (the “WF Term Loans”) in the maximum aggregate principal amount of $18,500,000 ($16,790,000 of which was advanced to the Company on October 28, 2020). The proceeds from the WF Term Loans were used to pay off the Company’s existing outstanding indebtedness with KeyBank National Association, and to pay certain fees and expenses associated with the financing.

At the option of the Company, the WF Term Loans bears interest at a per annum rate equal to LIBOR plus a margin of 300 basis points or base rate plus a margin of 200 basis points. LIBOR rate means the greater of (a) 0.75% per annum and (b) the per annum published LIBOR rate for interest periods of one, three or six months as chosen by the Company. Base rate is the greater of (a) 1.00% per annum, (b) the Federal Funds Rate plus 0.50%, (c) LIBOR Rate plus 100 basis or (d) prime rate. The weighted average interest rate was 3.77% at December 31, 2021 and 2020.

The WF Term Loans are to be repaid in monthly installments of $200,000 plus interest, with the remaining outstanding balance due on November 30, 2024, subject to certain optional and mandatory repayment terms. The Company’s obligations under the WF Term Loans are unconditionally guaranteed by each of the Company’s U.S. and Canadian subsidiaries, with such obligations of the Company and such subsidiaries being secured by a lien on substantially all of their U.S. and Canadian assets.

The WF Term Loans contains reporting, indebtedness, and financial covenants. The Company is in compliance with its covenants as of December 31, 2021 and 2020.

Voluntary prepayments of amounts outstanding under the WF Term Loans are permitted at any time without premium or penalty. To the extent applicable, LIBOR breakage fees may be charged in connection with any prepayment.

FGI Equipment Finance LLC Term Loan

On October 20, 2020, the Company entered into a Master Security Agreement and a Promissory Note, among FGI Equipment Finance LLC, (“FGI”), the Company as debtor, and each of Core Composites Corporation, a subsidiary of the Company organized in Delaware, and CC HPM, S. de R.L. de C.V., a subsidiary of the Company organized in Mexico, as guarantors, a term loan in the principal amount of $13,200,000 (the “FGI Term Loan”). On October 27, 2020, FGI advanced to the Company $12,000,000 which proceeds were used to pay off the Company’s existing outstanding indebtedness with KeyBank National Association, and to pay certain fees and expenses associated with the transactions, and $1,200,000 which proceeds were used to fund a security deposit to be held by FGI. The security deposit of $1,200,000 is located in other non-current assets on the balance sheet. Interest on the FGI Term Loan is a fixed rate of 8.25% and is payable monthly.

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Following the advance of funds by FGI, the FGI Term Loans are to be repaid in monthly principal and interest installments of $117,000 for the first 12 months, $246,000 for the subsequent 59 months and $1,446,000 due on October 31, 2026, subject to certain optional and mandatory repayment terms. The Company’s obligations under the Master Security Agreement are secured by certain machinery and equipment of the guarantors located in Mexico, and real property of Core Composites de Mexico, S. de R.L. de C.V., a subsidiary of the Company organized in Mexico, located in Matamoros, Mexico.

The Company may prepay in full or in part (but not less than the amount equal to 20% of the original principal amount of the loan) outstanding amounts before they are due on any scheduled Payment Date upon at least thirty (30) days’ prior written notice. The Company will pay a “Prepayment Fee” in an amount equal to an additional sum equal to the following percentage of the principal amount to be prepaid for prepayments occurring in the indicated period: four percent (4.0%) (for prepayments occurring prior to the first anniversary of the Loan); three percent (3.0%) (for prepayments occurring on and thereafter and prior to the second anniversary of the Loan); two percent (2.0%) (for prepayments occurring on and thereafter and prior to the third anniversary of the Loan ); and one percent (1.0%) (for prepayments occurring any time thereafter).

Leaf Capital Funding

On April 24, 2020 the Company entered into a finance agreement with Leaf Capital Funding of $175,000 for equipment. The parties agreed to a fixed interest rate of 5.5% and a term of 60 months.

Revolving Loans

Wells Fargo Revolving Loan

On October 27, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, lead arranger and book runner, and the lenders party thereto (the “Lenders”). Pursuant to the terms of the Credit Agreement, the Lenders made available to the Company a revolving loan commitment (the “WF Revolving Loan”) of $25,000,000 ($8,745,000 of which was advanced to the Company on October 28, 2020). The proceeds from the WF Revolving Loan were used to pay off the Company’s existing outstanding indebtedness with KeyBank National Association, and to pay certain fees and expenses associated with the financing.

The borrowing availability under the line of credit is the lesser of (a) the loan commitment of $25,000,000 or (b) the sum of 90% of eligible investment grade accounts receivable, 85% of non-investment grade eligible accounts receivable and 65% of eligible inventory.

The Credit Agreement also makes available to the Company an incremental revolving commitment in the maximum amount of $10,000,000 at the Company’s option at any time during the three-year period following the closing.

At the option of the Company, the WF Revolving Loan bears interest at a per annum rate equal to LIBOR plus a margin of 200 to 250 basis points or base rate plus a margin of 100 to 150 basis points, with the margin rate being based on the excess availability amount under the line of credit. LIBOR rate means the greater of (a) 0.75% per annum and (b) the per annum published LIBOR rate for interest periods of one, three or six months as chosen by the Company. Base rate is the greater of (a) 1.0% per annum, (b) the Federal Funds Rate plus 0.5%, (c) LIBOR Rate plus 100 basis and (d) prime rate. The weighted average interest rate was 4.25% and 4.75% as of December 31, 2021 and 2020, respectively.

The WF Revolving Loan commitment terminates, and all outstanding borrowings thereunder must be repaid, by November 30, 2024. The Company has available $24,337,000 of available rate revolving loans of which $4,424,000 is outstanding as of December 31, 2021. As of December 31, 2020, the Company had $19,223,000 of available rate revolving loans of which $420,000 was outstanding.

The WF Revolving Loan contains the same covenants as the WF Term Loans.

Wells Fargo Bank will issue up to $2,000,000 of Letters of Credit in accordance with the terms of the Credit Agreement upon the Company’s request. As of December 31, 2021 and 2020, the Company had one Letter of Credit outstanding for $160,000.

In conjunction with the October debt refinancing, the Company incurred debt origination fees of $1,730,000 related to the Wells Fargo financing, which is being amortized over the life of the Credit Agreement, which expires on November 30, 2024. In addition, the Company incurred debt origination fees of $308,000 related to the FGI Term Loan, which is being

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amortized over the life of the FGI Term Loan, which expires on October 31, 2026. The aggregate unamortized deferred financing fees as of December 31, 2021 and 2020 totaled $1,478,000 and $1,957,000, respectively.

KeyBank Loan

On December 31, 2019, the Company had a term loan and revolving loan balance of $38,250,000 and $12,008,000 with Key Bank National Association, respectively. The Company’s term loan and revolving loan had variable interest rates of 6.30% and 6.04%, respectively at December 31, 2019.

Interest Rate Swaps

The Company entered into two interest rate swap agreements that became effective January 18, 2018, one of which was designated as a cash flow hedge for $25,000,000 and the other designated as a cash flow hedge for $10,000,000 to the Company’s subsidiary. Under these agreements, the Company paid a fixed rate of 2.49% to the counterparty and received a 30-day LIBOR for both cash flow hedges. Concurrent with the closing of the KeyBank credit agreement , the Company settled both outstanding interest rate swaps, which resulted in a loss and cash outflow of $1,253,000. These results were categorized as interest expense and operating activities in the Statement of Operations and Statement of Cash Flow, respectively. Due to the settlement, the fair value of the interest rate swaps was $0 at December 31, 2021 and December 31, 2020.

Shelf Registration

On December 11, 2020 the Company filed a new universal shelf Registration Statement on Form S-3 (the “Registration Statement”) with the SEC in accordance with the Securities Act of 1933, as amended, which became effective on December 16, 2020. The Registration Statement replaces an existing shelf Registration Statement which expired on November 14, 2020. The Registration Statement registered common stock, preferred stock, debt securities, warrants, depositary shares, rights, units, and any combination of the foregoing, for a maximum aggregate offering price of up to $50 million, which may be sold from time to time. The terms of any securities offered under the Registration Statement and intended use of proceeds will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings. The Registration Statement has a three-year term.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET TRANSACTIONS

The Company has the following minimum commitments under contractual obligations, including purchase obligations, as defined by the SEC. A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Other long-term liabilities are defined as long-term liabilities that are reflected on the Company’s balance sheet under accounting principles generally accepted in the United States. Based on this definition, the table below includes only those contracts which include fixed or minimum obligations. It does not include normal purchases, which are made in the ordinary course of business.

The following table provides aggregated information about the maturities of contractual obligations and other long-term liabilities as of December 31, 2021:

(A)    Variable interest rates were as of December 31, 2021.

As of December 31, 2021 and 2020, the Company had no significant off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to accounts receivable, inventories, goodwill and other long-lived assets, self-insurance, post retirement benefits, revenue recognition and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Accounts Receivable Allowances

Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has determined that a $90,000 allowance for doubtful accounts is needed at December 31, 2021 and $41,000 at December 31, 2020. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for estimated chargebacks of $222,000 at December 31, 2021 and $179,000 at December 31, 2020. There have been no material changes in the methodology of these calculations.

Inventories

Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or net realizable value. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage. The Company has recorded an allowance for slow moving and obsolete inventory of $362,000 at December 31, 2021 and $546,000 at December 31, 2020.

Long-Lived Assets

Long-lived assets consist primarily of property, plant and equipment and finite-lived intangibles. The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. The Company evaluates, whether impairment exists for long-lived assets on the basis of undiscounted expected future cash flows from operations before interest. There was no impairment of the Company's long-lived assets for the years ended December 31, 2021, 2020, and 2019.

Goodwill

The purchase consideration of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates. Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and requires these assets be reviewed for impairment at the reporting unit level.

The annual impairment tests of goodwill may be completed through qualitative assessments; however the Company may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for the reporting unit in any period. The Company may resume the qualitative assessment for the reporting unit in any subsequent period.

Under a qualitative and quantitative approach, the impairment test for goodwill consists of an assessment of whether it is more-likely-than-not that the reporting unit’s fair value is less than its carrying amount. As part of the qualitative assessment, the Company considers relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include changes in economic conditions, industry and market conditions, cost factors, overall financial performance, reporting unit specific events and capital markets pricing. The Company places

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more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform step one of the impairment test. If the Company elects to bypass the qualitative assessment for the reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of the reporting unit exceeds its fair value, the Company proceeds to a quantitative approach.

The Company performed a qualitative analysis for the years end December 31, 2021 and 2020 and determined there was no impairment of the Company’s goodwill.

Due to the Company's financial performance and depressed stock price, the Company performed a quantitative analysis at September 30, 2019. During 2019, the Company incurred a loss of margin caused by selling price decreases that the Company was not able to fully offset with material cost reductions. As a result of the quantitative analysis, the Company concluded that the carrying value was greater than the fair value, which resulted in a goodwill impairment charge of $4,100,000 at September 30, 2019 representing 19% of the goodwill.

Self-Insurance

The Company is self-insured with respect to Columbus and Batavia, Ohio; Gaffney, South Carolina; Winona, Minnesota; and Brownsville, Texas for medical, dental and vision claims and Columbus and Batavia, Ohio for workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company is also self-insured for dental and vision with respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at December 31, 2021 and December 31, 2020 of $916,000 and $933,000, respectively.

Post Retirement Benefits

Management records an accrual for post retirement costs associated with the health care plan sponsored by the Company for certain employees. Should actual results differ from the assumptions used to determine the reserves, additional provisions may be required. In particular, increases in future healthcare costs above the assumptions could have an adverse effect on the Company's operations. The effect of a change in healthcare costs is described in Note 12 - Post Retirement Benefits. The Company had a liability for post retirement healthcare benefits based on actuarially computed estimates of $9,080,000 at December 31, 2021 and $9,109,000 at December 31, 2020.

Revenue Recognition

The Company historically has recognized revenue from two streams, product revenue and tooling revenue. Product revenue is earned from the manufacture and sale of sheet molding compound and thermoset and thermoplastic products. Revenue from product sales is generally recognized as products are shipped, as the Company transfers control to the customer and is entitled to payment upon shipment. In certain circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes control at our production facility.

Tooling revenue is earned from manufacturing multiple tools, molds and assembly equipment as part of a tooling program for a customer. Given that the Company is providing a significant service of producing highly interdependent component parts of the tooling program, each tooling program consists of a single performance obligation to provide the customer the capability to produce a single product. Based on the arrangement with the customer, the Company recognizes revenue either at a point in time or over time. When the Company does not have an enforceable right to payment, the Company recognizes tooling revenue at a point in time. In such cases, the Company recognizes revenue upon customer acceptance, which is when the customer has legal title to the tools.

Certain tooling programs include an enforceable right to payment. In those cases, the Company recognizes revenue over time based on the extent of progress towards completion of its performance obligation. The Company uses a cost-to-cost measure of progress for such contracts because it best depicts the transfer of value to the customer and also correlates with the amount of consideration to which the entity expects to been titled in exchange for transferring the promised goods or services to the customer. Under the cost-to-cost measure of progress, progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.

Income Taxes

The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the Company is more likely than not to realize deferred tax benefits through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the Company using a

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number of alternatives to evaluate financial results in economic cycles at various industry volume conditions. The projected availability of taxable income to realize the tax benefits from the reversal of temporary differences before expiration of these benefits are also considered. The Company evaluates provisions and deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence.

As of December 31, 2021 the Company had a net deferred tax asset of $521,000 consisting of a liability of $572,000 related to tax positions in the United States, an asset of $252,000 related to tax positions in Canada and a liability of $841,000 related to tax positions in Mexico. The deferred tax liabilities are in other non-current liabilities on the Consolidated Balance Sheet. During 2020, the Company recorded a valuation allowance of $3,168,000 against the entire state and local net loss carryforward and a portion of the interest limitation carryforward, due to cumulative losses in the United States over the last three years and uncertainty related to the Company’s ability to realize the deferred assets. The Company believes that the deferred tax assets associated with the Canadian and Mexican tax jurisdictions are more-likely-than-not to be realizable based on estimates of future taxable income.

Management recognizes the financial statement effects of a tax position when it is more likely than not the position will be sustained upon examination.

Recent Accounting Pronouncements

Current expected credit loss (CECL)

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments -Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. Subsequent to issuing ASU 2016 -13, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, which is effective with the adoption of ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326),” which is also effective with the adoption of ASU 2016-13. In November 2019, the FASB voted to delay the implementation date for certain companies, including those that qualify as a smaller reporting company under SEC rules, until fiscal years beginning after December 15, 2022. We will adopt this ASU on its effective date of January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

Facilitation of the Effects of Reference Rate Reform

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis.