Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company") was incorporated in Delaware in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into
two
reportable operating segments, the Metals Segment and the Specialty Chemicals Segment. As of December 31, 2018, the Metals Segment operated as
three
reportable units including BRISMET, Palmer, and Specialty. As of January 1, 2019, the Metals Segment also includes ASTI; see Note 23 to the consolidated financial statements. Two other operations, Bristol Fab (a division of BRISMET) and Ram-Fab, LLC, were sold or closed during 2014; see Note 19. BRISMET manufactures stainless steel and special alloy pipe and tube, Palmer manufactures liquid storage solutions and separation equipment and Specialty is a master distributor of seamless carbon pipe and tube. The Specialty Chemicals Segment operates as
one
reportable unit and is comprised of MC and CRI Tolling, and produces specialty chemicals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The Metals Segment is comprised of
three
subsidiaries: Synalloy Metals, Inc. which owns
100 percent
of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; Palmer, located in Andrews, Texas and Specialty, located in Mineral Ridge, Ohio and Houston, Texas.
The Specialty Chemicals Segment consists of
two
subsidiaries: MS&C which owns
100 percent
of MC, located in Cleveland, Tennessee and CRI Tolling, located in Fountain Inn, South Carolina. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for doubtful accounts for projected uncollectable amounts. The allowance is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within
30
to
60
days. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods.
Inventory cost is adjusted when its recorded cost is below net realizable value. At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below cost. This would indicate that an adjustment would be required.
In addition, the Company establishes inventory reserves for:
|
|
•
|
Estimated obsolete or unmarketable inventory. The Company identified inventory items with no sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved
$316,903
and
$411,157
at
December 31, 2018
and
December 31, 2017
, respectively.
|
|
|
•
|
Estimated quantity losses. The Company performs an annual physical count of inventory during the fourth quarter each year. For those facilities that complete their physical inventory counts before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the most recent physical inventory results. At
December 31, 2018
and
December 31, 2017
, the Company had
$359,505
and
$285,627
, respectively, reserved for physical inventory quantity losses.
|
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful life of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable lease term, buildings are depreciated over a range of
ten years
to
40 years
, and machinery, fixtures and equipment are depreciated over a range of
three years
to
20 years
. The costs of software licenses are amortized over
five years
using the straight-line method. The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value of the asset, the assets are written down to fair value.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired, if any, and liabilities assumed.
Goodwill, Intangible Assets and Deferred Charges
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate that the carrying value may not be recoverable.
No
goodwill impairment was identified as a result of the testing procedures performed for the years ended
December 31, 2018
and
December 31, 2017
.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions. Deferred charges represent other intangible assets and debt issuance costs. Intangible assets are amortized over their estimated useful lives using either an accelerated or straight-line method. Deferred charges are amortized over their estimated useful lives using the straight-line method. Deferred charges are amortized over a period ranging from
three
to
ten
years and intangible assets are amortized over a period ranging from
eight
to
15
years. The weighted average amortization period for the customer relationships is approximately
eleven
years.
Deferred charges and intangible assets totaled
$23,247,498
and
$21,837,351
at
December 31, 2018
and
December 31, 2017
, respectively. Accumulated amortization of deferred charges and intangible assets as of
December 31, 2018
and
December 31, 2017
totaled
$13,043,424
and
$10,693,175
, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets, excluding deferred charges is as follows:
|
|
|
|
2019
|
2,297,570
|
|
2020
|
2,129,528
|
|
2021
|
2,021,486
|
|
2022
|
1,790,631
|
|
2023
|
328,416
|
|
Thereafter
|
1,128,754
|
|
The Company recorded amortization expense of
$2,363,277
,
$2,443,117
and
$2,459,787
for
2018
,
2017
and
2016
, respectively, which excludes amortization expense of debt issuance costs, which is reflected in the consolidated financial statements as interest expense.
Earn-Out Liability
In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make contingent earn-out payments to the prior owners based on actual sales levels of stainless steel pipe and tube (outside diameter of ten inches or less). The Company determined the fair value of the earn-out liability on the acquisition date using a Monte Carlo simulation model. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out payments for a period of
four years
following closing, based on actual sales levels of galvanized pipe and tube. The fair value of
the contingent consideration was estimated by applying the probability-weighted expected return method using management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated Statements of Operations and Comprehensive Income.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time. Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its standalone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines standalone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin. Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including amounts which are refundable.
Shipping Costs
Shipping costs of approximately
$9,846,616
,
$7,502,945
and
$4,488,041
in
2018
,
2017
and
2016
, respectively, are recorded in cost of goods sold.
Research and Development Expenses
The Company incurred research and development expense of approximately
$548,464
,
$556,181
and
$603,067
in
2018
,
2017
and
2016
, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
Additionally, the Company maintains reserves for uncertain tax provisions.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding during each period.
Fair Market Value
The Company makes estimates of fair value in accounting for certain transactions, in testing and measuring impairment and in providing disclosures of fair value in its consolidated financial statements. The Company determines the fair values of its financial instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Fair value disclosures for assets and liabilities are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1
- Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
- Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are less active.
Level 3
- Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
Estimates of fair value using levels 2 and 3 may require judgments as to the timing and amount of cash flows, discount rates, and other factors requiring significant judgment, and the outcomes may vary widely depending on the selection of these assumptions. The Company's most significant fair value estimates as of December 31, 2018 and December 31, 2017 relate to the purchase price allocation relating to the 2017 MUSA-Stainless and 2018 MUSA-Galvanized acquisitions, earn-out liabilities, nickel forward
option contracts, estimating the fair value of the reporting units in testing goodwill for impairment, estimating the fair value of the interest rate swap, and providing disclosures of the fair values of financial instruments.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions, primarily for testing goodwill for impairment, determining balances for the earn-out liabilities, estimating fair value of identifiable assets acquired and liabilities assumed as a result of business acquisitions and for establishing reserves on accounts receivable, inventories and environmental issues, that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable.
Recent accounting pronouncements
Recently Issued Accounting Standards - Adopted
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)
". Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The adoption of this Topic did not have an effect on the Company's consolidated financial statements. See Note 22 for further details.
In January 2016, the FASB issued ASU No. 2016-01, "
Financial Instruments (Topic 825)",
to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard requires equity investments (except for those under the equity method of accounting) to be measured at fair value, with changes in fair value recognized in net income. The amendments in the update supersede the guidance to classify equity securities with readily determinable fair values into different categories, and require equity securities to be measured at fair value with changes recognized in net income as opposed to comprehensive income. The Company adopted ASU 2016-01 effective January 1, 2018 and the effects of this standard are included in the accompanying consolidated financial statements. The Company applied the standard by means of a cumulative effective adjustment to the balance sheet as of January 1, 2018, which resulted in a reclassification of
$10,864
from Accumulated Other Comprehensive Loss to Retained Earnings. The adoption of this standard also resulted in a
$2,573,000
mark-to-market valuation loss on investments in equity securities recognized in net income in 2018, which would have previously been recorded to Comprehensive Income.
In January 2017, the FASB issued ASU No. 2017-01 “
Business Combinations (Topic 805): Clarifying the Definition of a Business.
” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted ASU 2017-01 as of January 1, 2018 on a prospective basis. The adoption of this Topic did not have an effect on the Company's consolidated financial statements as of December 31, 2018.
In May 2017, the FASB issued ASU 2017-09,
"Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,"
which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The Company adopted ASU 2017-09 as of January 1, 2018 on a prospective basis. The adoption of this Topic did not have an effect on the Company's consolidated financial statements as of December 31, 2018.
Recently Issued Accounting Standards - Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02
"Leases (Topic 842)",
as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We will adopt the new standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods. We will elect the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We did not elect the hindsight practical expedient to determine the reasonably certain lease
term for existing leases. We also elected to combine lease and non-lease components and elected the short-term lease recognition exemption for all leases that qualify. On adoption, we currently expect to recognize additional operating liabilities ranging from
$32,000,000
to
$36,000,000
with corresponding right-of-use assets of a materially similar amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company will also record a cumulative-effect adjustment to equity totaling approximately
$6,000,000
related to the derecognition of the existing deferred gain for a sale leaseback transaction that occurred in 2016 (see note 12 to the Consolidated Financial Statements). We do not expect the new standard to have a material impact on the consolidated statement of operations.
In August 2018, the FASB issued ASU No. 2018-13 "
Fair Value Measurement (Topic 820)"
. The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact of adopting the updated provisions.
Note 2 Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, revolving line of credit and equity investments.
Level 1 Financial Instruments
For short-term instruments, other than those required to be reported at fair value on a recurring basis and for which additional disclosures are included below, management concluded the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization. Therefore as of
December 31, 2018
and
December 31, 2017
, the carrying amount for cash and cash equivalents, accounts receivable, accounts payable and the Company's revolving line of credit, which is based on a variable interest rate, approximates their fair value.
During
2018
, the Company recorded an unrealized loss on its Level 1 investment in equity securities of
$2,572,703
which is included in "Other expense (income)" on the accompanying Consolidated Statement of Operations. The fair value of equity securities held by the Company as of December 31, 2018 and
December 31, 2017
was
$2,935,000
and
$537,233
, respectively, and is included in “Prepaid expenses and other current assets” on the accompanying Consolidated Balance Sheets. The equity securities are classified as Level 1 financial instruments. The Company did not have any equity securities at December 31, 2016.
During 2017, the Company sold shares of its equity securities investments. Proceeds from the sale totaled
$4,141,564
which resulted in a realized gain of
$310,043
which is included in other income on the accompanying consolidated statements of operations. As a result of the sale, unrealized gains of
$555,979
,
$366,346
net of taxes, were reclassified out of accumulated other comprehensive income ("AOCI") with the realized gain on sale included in earnings. The Company used the average cost method to determine the realized gain or loss for each transaction.
Level 2 Financial Instruments
The Company has
one
interest rate swap contract, which is classified as a Level 2 financial instrument as it is not actively traded and is valued using pricing models that use observable market inputs. The fair value of the interest rate swap contract entered into on August 21, 2012 was an asset of
$147,465
and
$127,981
at
December 31, 2018
and
December 31, 2017
, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in its fair value were recorded to other income (expense) with corresponding offsetting entries to current assets or liabilities, as appropriate. Significant inputs to the discounted cash flow model include projected future cash flows based on projected one-month LIBOR and the average margin for companies with similar credit ratings and similar maturities. See Note 17 for further discussion of interest rate swap.
To manage the impact on earnings of fluctuating nickel prices, the Company occasionally enters into
three
-month forward option contracts, which are classified as Level 2. At December 31, 2018, the Company had no such contracts in place. At December 31, 2017, the Company had contracts in place with notional quantities totaling
1,351,494
pounds with strike prices ranging from
$3.75
to
$4.64
per pound. The fair value of the option contracts was an asset of
$9,027
at December 31, 2017. The fair value of the contracts was priced using discounted cash flow techniques based on forward curves and volatility levels by asset class determined on the basis of observable market inputs, when available. Changes in their fair value were recorded to "Other expense (income)" with corresponding offsetting entries to other current assets.
Level 3 Financial Instruments
The fair value of contingent consideration liabilities ("earn-out") resulting from the 2017 MUSA-Stainless acquisition and 2018 MUSA-Galvanized acquisition are classified as Level 3. The fair value of the MUSA-Stainless earn-out was estimated by applying the Monte Carlo Simulation approach using management's projection of pounds to be shipped and future price per unit. The fair value of the MUSA-Galvanized earn-out was estimated by applying the probability-weighted expected return method, using
management's projection of pounds to be shipped and future price per unit. Each quarter-end, the Company re-evaluates its assumptions for both earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in the results of operations in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results. There were no changes in the carrying amount of the earn-out liability for the year ended December 31, 2016.
The following table presents a summary of changes in fair value of the Company's Level 3 liabilities measured on a recurring basis for
2018
:
|
|
|
|
|
|
MUSA Earn-Out Liabilities
|
|
|
Balance at December 31, 2016
|
|
$
|
—
|
|
Fair value of the earn-out liability associated with the MUSA-Stainless acquisition
|
|
4,663,783
|
|
Earn-out payments to MUSA
|
|
(518,456
|
)
|
Changes in fair value during the period
|
|
688,523
|
|
Balance at December 31, 2017
|
|
$
|
4,833,850
|
|
Fair value of the earn-out liability associated with the MUSA-Galvanized acquisition
|
|
3,800,298
|
|
Earn-out payments to MUSA
|
|
(2,455,446
|
)
|
Changes in fair value during the period
|
|
1,430,682
|
|
Balance at December 31, 2018
|
|
$
|
7,609,384
|
|
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 in the years ended
December 31, 2018
or
December 31, 2017
. There have also been no changes in the fair value methodologies used by the Company during the years ended
December 31, 2018
or
December 31, 2017
.
Note 3 Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land
|
$
|
62,916
|
|
|
$
|
62,916
|
|
Leasehold improvements
|
1,162,942
|
|
|
544,186
|
|
Buildings
|
412,301
|
|
|
412,301
|
|
Machinery, fixtures and equipment
|
91,514,620
|
|
|
81,229,311
|
|
Machinery and equipment under capital lease
|
1,416,114
|
|
|
401,077
|
|
Construction-in-progress
|
3,643,795
|
|
|
2,881,654
|
|
|
98,212,688
|
|
|
85,531,445
|
|
Less accumulated depreciation
|
57,288,233
|
|
|
50,451,436
|
|
Property, plant and equipment, net
|
$
|
40,924,455
|
|
|
$
|
35,080,009
|
|
The Company recorded depreciation expense of
$6,411,900
,
$5,294,695
, and
$4,235,203
for
2018
,
2017
and
2016
, respectively. Accumulated depreciation includes
$707,112
and
$86,357
at
December 31, 2018
and
December 31, 2017
, respectively, for assets acquired under capital leases.
Note 4 Goodwill
Changes in the carrying amount of goodwill by segment for the year ended December 31, 2018 and December 31, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Chemicals Segment
|
|
Metals Segment
|
|
Total
|
Balance at December 31, 2016
|
$
|
1,354,730
|
|
|
$
|
—
|
|
|
$
|
1,354,730
|
|
MUSA-Stainless Acquisition
|
—
|
|
|
4,648,795
|
|
|
4,648,795
|
|
Balance at December 31, 2017
|
$
|
1,354,730
|
|
|
$
|
4,648,795
|
|
|
$
|
6,003,525
|
|
MUSA-Galvanized Acquisition
|
—
|
|
|
3,796,467
|
|
|
3,796,467
|
|
Balance at December 31, 2018
|
$
|
1,354,730
|
|
|
$
|
8,445,262
|
|
|
$
|
9,799,992
|
|
Note 5 Long-term Debt
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
$100,000,000 Revolving line of credit, due December 20, 2021
|
$
|
76,405,458
|
|
|
$
|
25,913,557
|
|
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an asset-based revolving line of credit (the "Line") in the amount of
$45,000,000
. The Line was used to refinance and consolidate all previous debt agreements. The maturity date of the Line was February 28, 2019. Interest on the Line was calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Line were limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable and inventory.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 12.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the Line by
$20,000,000
to a maximum of
$65,000,000
and extended the maturity date to October 30, 2020. None of the other provisions of the Credit Agreement were changed as a result of this amendment.
On June 29, 2018, the Company amended its Credit Agreement with its bank to increase the limit of the Line by
$15,000,000
to a maximum of
$80,000,000
. As a result of the amendment, the interest rate on the Line is now calculated using One Month LIBOR plus a spread of
1.65 percent
. None of the other provisions of the Credit Agreement were changed as a result of this amendment.
On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its Line from
$80,000,000
to
$100,000,000
and to create a new
5
-year term loan in the principal amount of
$20,000,000
(the “Term Loan”). The Term Loan was used to finance the purchase of substantially all of the assets of American Stainless (see Note 23). The Term Loan’s maturity date is February 1, 2024, and shall be repaid in
60
consecutive monthly installments. Interest on the Term Loan is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus
1.90 percent
. The Line will be used for working capital needs and as a source for funding future acquisitions. The maturity date has been extended to December 20, 2021. Interest on the Line remains unchanged and is calculated using the One Month LIBOR Rate, plus
1.65 percent
. Borrowings under the Line are limited to an amount equal to a Borrowing Base calculation that includes eligible accounts receivable and inventory.
Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. The Company evaluated this transaction and determined the restructuring should be accounted for as a debt modification. The Company incurred lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet in non-current assets. At
December 31, 2018
, the Company was in compliance with all debt covenants.
The Line interest rate was
4.19 percent
and
3.44 percent
at
December 31, 2018
and
December 31, 2017
, respectively. Additionally, the Company is required to pay a fee equal to
0.15 percent
on the average daily unused amount of the Line on a quarterly basis. As of
December 31, 2018
, the amount available for borrowing under the Line was
$93,860,450
of which
$76,405,458
was borrowed, leaving
$17,454,992
of availability. Average Line borrowings outstanding during fiscal
2018
and
2017
were
$49,030,098
and
$27,895,901
with weighted average interest rates of
4.51 percent
and
3.09 percent
, respectively.
The Company made interest payments on all credit facilities of
$1,725,150
in
2018
,
$856,651
in
2017
and
$826,478
in
2016
.
Note 6 Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Salaries, wages, and commissions
|
5,208,495
|
|
|
3,219,190
|
|
Taxes, other than income taxes
|
852,116
|
|
|
921,476
|
|
Current portion of earn-out liability
|
2,906,822
|
|
|
1,663,751
|
|
Advances from customers
|
177,518
|
|
|
184,874
|
|
Insurance
|
321,000
|
|
|
372,000
|
|
Professional fees
|
256,296
|
|
|
343,706
|
|
Warranty reserve
|
38,020
|
|
|
37,771
|
|
Benefit plans
|
265,605
|
|
|
208,717
|
|
Insurance financing liability
|
347,440
|
|
|
224,961
|
|
Current portion, capital lease obligation
|
267,028
|
|
|
76,198
|
|
Customer rebate liability
|
701,361
|
|
|
439,912
|
|
Current portion, environmental reserves
|
—
|
|
|
549,000
|
|
Current portion, deferred gain sale-leaseback
|
334,273
|
|
|
334,273
|
|
Other accrued items
|
487,712
|
|
|
417,625
|
|
Total accrued expenses
|
$
|
12,163,686
|
|
|
$
|
8,993,454
|
|
Note 7 Environmental Compliance Costs
Prior to 1987, the Company utilized certain products at its chemical facilities that are currently classified as hazardous materials. Testing of the groundwater in the areas of the former wastewater treatment impoundments at these facilities disclosed the presence of certain contaminants. In addition, several solid waste management units ("SWMUs") at the plant sites have been identified. During 2014, at the former Augusta, GA plant site, the Georgia Department of Natural Resources, Environmental Protection Division ("EPD") closed the surface impoundment regulated unit since the Company met post-closure clean-up goals and the Company renewed the Corrective Action Permit, which includes a site-wide corrective action plan, long-term monitoring and institutional controls; such actions were completed in the second quarter of 2018. In the first quarter of 2019, the Company and EPD executed an Environmental Covenant with respect to the Augusta, GA plant site. Because the Company does not anticipate material future costs associated with the corrective action efforts,
no
reserve was deemed necessary at December 31, 2018. At December 31, 2017, the Company had accrued
$474,000
for the completion of the site-wide corrective action plan. As a result of the evolving nature of the environmental regulations, the difficulty in estimating the extent and remedy of environmental contamination and the availability and application of technology, the estimated costs for future environmental compliance and remediation are subject to uncertainties and it is not possible to predict the amount or timing of future costs of environmental matters which may subsequently be determined.
The Company does not anticipate any insurance recoveries to offset the environmental remediation costs it has incurred. Due to the uncertainty regarding court and regulatory decisions, and possible future legislation or rulings regarding the environment, many insurers will not cover environmental impairment risks, particularly in the chemical industry. Hence, the Company has been unable to obtain this coverage at an affordable price.
There can be no assurance that any future capital and operating expenditures to maintain compliance with environmental laws, as well as costs to address contamination or environmental claims, will not exceed any current estimates or adversely affect our financial condition and results of operations. In addition, any unanticipated liabilities or obligations arising, for example, out of discovery of previously unknown conditions or changes in laws or regulations, could have an adverse effect on our business, financial condition, results of operations or cash flows.
Note 8 Deferred Compensation
The Company has deferred compensation agreements with certain former officers providing for payments for the longer of
ten years
or life from age
65
. The present value of such vested future payments,
$116,785
at
December 31, 2018
and
$159,080
at
December 31, 2017
, has been accrued.
Note 9 Stock Options, Stock Grants and New Stock Issues
A summary of activity in the Company's stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average
Contractual
Term
(in years)
|
|
Intrinsic
Value of
Options
|
|
Options
Available
|
At January 01, 2016
|
$
|
12.79
|
|
|
173,985
|
|
|
6.4
|
|
$
|
—
|
|
|
152,028
|
|
Expired
|
$
|
16.01
|
|
|
(937
|
)
|
|
|
|
|
|
|
937
|
|
At December 31, 2016
|
$
|
12.77
|
|
|
173,048
|
|
|
5.4
|
|
$
|
—
|
|
|
152,965
|
|
Exercised
|
$
|
11.55
|
|
|
(25,632
|
)
|
|
|
|
$
|
78,818
|
|
|
|
|
Expired
|
$
|
15.26
|
|
|
(1,905
|
)
|
|
|
|
|
|
|
1,905
|
|
At December 31, 2017
|
$
|
12.96
|
|
|
145,511
|
|
|
4.6
|
|
$
|
156,445
|
|
|
154,870
|
|
Exercised
|
$
|
12.09
|
|
|
(85,440
|
)
|
|
|
|
$
|
842,742
|
|
|
|
Expired
|
$
|
16.01
|
|
|
(975
|
)
|
|
|
|
|
|
975
|
|
At December 31, 2018
|
$
|
14.16
|
|
|
59,096
|
|
|
4.8
|
|
$
|
143,737
|
|
|
155,845
|
|
Exercisable options
|
$
|
13.82
|
|
|
49,127
|
|
|
4.5
|
|
$
|
136,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest:
|
|
|
|
|
|
|
|
|
Grant Date Fair Value
|
|
|
|
At December 31, 2016
|
$
|
14.72
|
|
|
43,286
|
|
|
7.1
|
|
$
|
6.24
|
|
|
|
|
Vested
|
$
|
14.35
|
|
|
(17,574
|
)
|
|
|
|
$
|
5.96
|
|
|
|
|
Forfeited options
|
$
|
15.38
|
|
|
(62
|
)
|
|
|
|
|
|
|
At December 31, 2017
|
$
|
14.72
|
|
|
25,650
|
|
|
6.5
|
|
$
|
6.41
|
|
|
|
|
Vested
|
$
|
14.78
|
|
|
(15,380
|
)
|
|
|
|
$
|
6.38
|
|
|
|
Forfeited options
|
$
|
16.01
|
|
|
(301
|
)
|
|
|
|
|
|
|
At December 31, 2018
|
$
|
15.83
|
|
|
9,969
|
|
|
6.0
|
|
$
|
6.44
|
|
|
|
The following table summarizes information about stock options outstanding at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding Stock Options
|
|
Exercisable Stock Options
|
|
Shares
|
|
Weighted Average
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
Exercise Price
|
|
Remaining Contractual Life in Years
|
|
|
$
|
11.35
|
|
|
13,402
|
|
|
$
|
11.35
|
|
|
3.10
|
|
13,402
|
|
|
$
|
11.35
|
|
$
|
13.70
|
|
|
15,933
|
|
|
$
|
13.70
|
|
|
4.10
|
|
15,933
|
|
|
$
|
13.70
|
|
$
|
14.76
|
|
|
8,109
|
|
|
$
|
14.76
|
|
|
5.14
|
|
6,643
|
|
|
$
|
14.76
|
|
$
|
16.01
|
|
|
21,652
|
|
|
$
|
16.01
|
|
|
6.11
|
|
13,149
|
|
|
$
|
16.01
|
|
|
|
|
59,096
|
|
|
|
|
|
|
|
49,127
|
|
|
|
|
The 2011 Long-Term Incentive Stock Option Plan (the "2011 Plan") is an incentive stock option plan; therefore, there are no income tax consequences to the Company when an option is granted or exercised. The stock options will vest in
20 percent
increments annually on a cumulative basis, beginning one year after the date of grant. In order for the options to vest, the employee must be in the continuous employment of the Company since the date of the grant. Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable. On
February 10, 2015
, the Company granted options to purchase
32,532
shares of its commons stock at an exercise price of
$16.01
per share to participants in the 2011 Plan. The per share weighted-average fair value of this stock option grant was
$6.39
. The Black-Scholes model for this grant was based on a risk-free interest rate of
two percent
, an expected life of
seven
years, an expected volatility of
0.46
and a dividend yield of
two percent
.
In 2018 and 2017, options for
85,440
and
25,632
shares, respectively, were exercised by employees and directors for an aggregate exercise price of
$1,033,110
and
$296,050
, respectively. The proceeds received by the Company were generated from the surrender of
10,578
shares previously owned from employees and directors in 2018 and from cash received of
$141,855
in 2018.
No
options were exercised by employees or directors in 2016. At the
2018
,
2017
and
2016
respective year ends, options to purchase
49,127
,
119,861
and
129,762
shares, respectively, with weighted average exercise prices of
$13.82
,
$12.45
and
$12.12
, respectively, were fully exercisable. Compensation cost charged against income before taxes for the options was approximately
$46,529
for
2018
,
$80,966
for
2017
and
$135,085
for
2016
. As of
December 31, 2018
, there was
$36,420
of unrecognized compensation cost related to unvested stock options granted under the Company's stock option plans. The weighted average period over which the stock option compensation cost is expected to be recognized is
1.06
years.
The Compensation & Long-Term Incentive Committee ("Compensation Committee") of the Board of Directors of the Company approved stock grants under the Company's 2005 Stock Awards Plan to certain management employees of the Company. The stock grants will vest in
20 percent
increments annually on a cumulative basis, beginning one year after the date of grant. In order for the grants to vest, the employee must be in the continuous employment of the Company since the date of the grant. Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
The 2015 Stock Awards Plan was approved by the Compensation Committee and authorizes the issuance of up to
250,000
shares which can be awarded for a period of
10 years
from the effective date of the plan. Prior to May 9, 2017, as discussed below, the stock awards vest in
20 percent
increments annually on a cumulative basis, beginning
one year
after the date of grant from shares held in treasury with the Company. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Any portion of an award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested upon an employee's failure to comply with all conditions of the award or the 2015 Stock Awards Plan. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
On February 19, 2016, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where
50,062
shares with a market price of
$7.51
per share were granted under the Plan. On May 5, 2016, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where
42,193
shares with a market price of
$8.05
per share were granted under the Plan.
On February 8, 2017, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where
44,687
shares with a market price of
$12.30
per share were granted under the Plan.
On February 7, 2018, the Compensation Committee approved stock grants under the Company\'s 2015 Stock Awards Plan to certain management employees of the Company where
65,527
shares with a market price of
$12.47
per share were granted under the Plan. These stock awards vest in either
20 percent
or
33 percent
increments annually on a cumulative basis, beginning
one year
after the date of grant.
Effective May 1, 2017, the Company's Board of Directors approved the First Amendment to the 2015 Stock Awards Plan. The amendment grants the Compensation Committee the authority to establish and amend vesting schedules for stock awards made pursuant to the 2015 Stock Awards Plan. On May 9, 2017, the Committee approved the amendment of the vesting schedules for the May 5, 2016 and February 8, 2017 stock grants reducing the vesting period from
five years
to
three years
. As a result of this amendment, compensation expense increased in 2017 by
$75,756
and
$67,180
, for the
five
employees receiving grants on May 5, 2016 and
eight
employees receiving grants on February 8, 2017, respectively.
On May 17, 2018, a majority of the shareholders of the Company, upon the recommendation of the Company's Board of Directors, voted to amend and restate the 2015 Stock Awards Plan to increase the authorization of issuances from
250,000
shares to
500,000
shares.
A summary of plan activity for the 2005 and 2015 Stock Awards Plans is as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date Fair Value
|
Outstanding at December 31, 2015
|
51,440
|
|
|
$
|
15.57
|
|
Granted February 19, 2016
|
50,062
|
|
|
$
|
7.51
|
|
Granted May 5, 2016
|
42,193
|
|
|
$
|
8.05
|
|
Vested
|
(21,133
|
)
|
|
$
|
13.12
|
|
Forfeited
|
(1,260
|
)
|
|
$
|
17.73
|
|
Outstanding at December 31, 2016
|
121,302
|
|
|
$
|
10.03
|
|
Granted February 8, 2017
|
44,687
|
|
|
$
|
12.30
|
|
Vested
|
(34,322
|
)
|
|
$
|
10.45
|
|
Outstanding at December 31, 2017
|
131,667
|
|
|
$
|
10.69
|
|
Granted February 7, 2018
|
65,527
|
|
|
$
|
12.47
|
|
Vested
|
(51,775
|
)
|
|
$
|
10.84
|
|
Forfeited
|
(3,245
|
)
|
|
$
|
10.96
|
|
Outstanding at December 31, 2018
|
142,174
|
|
|
$
|
11.45
|
|
Compensation expense on the grants issued is charged against earnings equally before forfeitures, if any, over a period of
60 months
from the date of the grants for grants prior to May 5, 2016, with the offset recorded in Shareholders' Equity. Compensation expense on grants issued after that date is charged against earnings over 36 months. Compensation cost charged against income for the awards was approximately
$780,469
,
$616,571
net of income taxes, or
$0.07
per share for
2018
,
$557,450
,
$354,538
net of income taxes, or
$0.04
per share for
2017
and
$324,388
,
$206,311
net of income taxes, or
$0.02
per share, for
2016
. As of
December 31, 2018
, there was
$1,077,095
of total unrecognized compensation cost related to unvested stock grants under the Company's Stock Awards Plan. The weighted average period over which the stock grant compensation cost is expected to be recognized is
1.88
years.
Each year, the Company allows each non-employee director to elect to receive up to
100 percent
of their annual retainer in restricted stock. The number of restricted shares issued is determined by the average of the high and low common stock price on the day prior to the Annual Meeting of Shareholders or the date prior to the appointment to the Board for those individuals that are appointed mid-term. On
May 17, 2018
,
May 18, 2017
and
May 5, 2016
, non-employee directors received an aggregate of
14,857
,
24,209
and
40,991
shares, respectively, of restricted stock in lieu of total retainer fees of
$276,000
,
$287,500
and
$330,000
, respectively. The shares granted to the directors are not registered under the Securities Act of 1933 and are subject to forfeiture in whole or in part upon the occurrence of certain events.
Note 10 Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows at the respective year ends:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred income tax assets:
|
|
|
|
Sale leaseback deferred gain
|
$
|
1,310,850
|
|
|
$
|
1,382,270
|
|
Inventory valuation reserves
|
174,377
|
|
|
209,745
|
|
Allowance for doubtful accounts
|
35,955
|
|
|
7,944
|
|
Inventory capitalization
|
1,500,710
|
|
|
943,203
|
|
Environmental reserves
|
—
|
|
|
124,029
|
|
Warranty accrual
|
8,084
|
|
|
8,132
|
|
Deferred compensation
|
28,090
|
|
|
36,617
|
|
Accrued bonus
|
910,824
|
|
|
483,238
|
|
Accrued expenses
|
22,957
|
|
|
24,749
|
|
State net operating loss carryforwards
|
1,934,071
|
|
|
2,069,258
|
|
Equity security mark to market
|
622,189
|
|
|
3,248
|
|
Straight line lease
|
230,841
|
|
|
123,570
|
|
Other
|
507,997
|
|
|
352,520
|
|
Total deferred income tax assets
|
7,286,945
|
|
|
5,768,523
|
|
Valuation allowance
|
(1,765,993
|
)
|
|
(2,087,860
|
)
|
Total net deferred income tax assets
|
5,520,952
|
|
|
3,680,663
|
|
Deferred income tax liabilities:
|
|
|
|
Tax over book depreciation and amortization
|
5,120,533
|
|
|
3,971,816
|
|
Prepaid expenses
|
377,498
|
|
|
174,322
|
|
Interest rate swap
|
103,708
|
|
|
87,016
|
|
Other
|
172,201
|
|
|
83,419
|
|
Total deferred income tax liabilities
|
5,773,940
|
|
|
4,316,573
|
|
Deferred income taxes
|
$
|
(252,988
|
)
|
|
$
|
(635,910
|
)
|
Significant components of the provision for income taxes from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
3,468,673
|
|
|
$
|
1,067,490
|
|
|
$
|
(980,495
|
)
|
State
|
290,459
|
|
|
106,832
|
|
|
190,230
|
|
Total current
|
3,759,132
|
|
|
1,174,322
|
|
|
(790,265
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
(107,879
|
)
|
|
(1,043,384
|
)
|
|
(1,329,302
|
)
|
State
|
(275,043
|
)
|
|
6,201
|
|
|
(78,433
|
)
|
Total deferred
|
(382,922
|
)
|
|
(1,037,183
|
)
|
|
(1,407,735
|
)
|
Total
|
$
|
3,376,210
|
|
|
$
|
137,139
|
|
|
$
|
(2,198,000
|
)
|
Tax benefit from discontinued operations amounted to
$51,000
for the fiscal year ended December 31, 2016. The Company did not have any discontinued operations for 2018 and 2017.
The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Tax at U.S. statutory rates
|
$
|
3,459,464
|
|
|
21.0
|
%
|
|
$
|
502,690
|
|
|
34.0
|
%
|
|
$
|
(3,125,382
|
)
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
268,924
|
|
|
1.6
|
%
|
|
65,546
|
|
|
4.4
|
%
|
|
(48,842
|
)
|
|
0.5
|
%
|
State valuation allowance
|
(314,505
|
)
|
|
(1.9
|
)%
|
|
8,498
|
|
|
0.6
|
%
|
|
95,961
|
|
|
(1.0
|
)%
|
Life insurance cash surrender value
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
503,700
|
|
|
(5.5
|
)%
|
Manufacturing exemption
|
—
|
|
|
—
|
%
|
|
(116,980
|
)
|
|
(7.9
|
)%
|
|
—
|
|
|
—
|
%
|
Stock option compensation
|
(39,401
|
)
|
|
(0.2
|
)%
|
|
226
|
|
|
—
|
%
|
|
45,929
|
|
|
(0.5
|
)%
|
Rate change effects
|
—
|
|
|
—
|
%
|
|
(380,961
|
)
|
|
(25.8
|
)%
|
|
—
|
|
|
—
|
%
|
Other, net
|
1,728
|
|
|
—
|
%
|
|
58,120
|
|
|
4.0
|
%
|
|
330,634
|
|
|
(3.6
|
)%
|
Total
|
$
|
3,376,210
|
|
|
20.5
|
%
|
|
$
|
137,139
|
|
|
9.3
|
%
|
|
$
|
(2,198,000
|
)
|
|
23.9
|
%
|
Income tax payments of
$2,419,009
,
$2,576,515
and
$991,888
were made in
2018
,
2017
and
2016
, respectively. The Company had state net operating loss carryforwards at the end of fiscal years
2018
and
2017
of
$46,511,086
and
$49,711,027
, respectively. The majority of these losses will expire between the years of 2018 and 2037, while various losses are not subject to expiration. A valuation allowance has been set up against
$41,742,152
of these state net operating loss carryforwards because it is not more likely than not that the losses will be realized in the foreseeable future. The portion of the valuation allowance for the state net operating loss carryforwards was
$1,689,246
and
$2,064,674
at December 31, 2018 and December 31, 2017, respectively. In addition, a
$76,747
and
$23,186
valuation allowance was established at December 31, 2018 and 2017 respectively, for other deferred tax assets. This resulted in a valuation allowance decrease of
$321,867
all related to continuing operations.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before 2013.
The Company had no uncertain tax position activity during 2018 or 2017. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain tax positions including interest and penalties at the end of 2018.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Tax Act”) was signed into law by the President of the United States, enacting significant changes to the Internal Revenue Code effective January 1, 2018. The Tax Act includes a number of provisions including, but not limited to, a permanent reduction of the U.S. corporate tax rate from
35 percent
to
21 percent
, eliminating the deduction for domestic production activities, limiting the tax deductibility of interest expense, accelerating the expensing of certain business assets and reducing the amount of executive pay that could qualify as a tax deduction. Many effects of The Tax Act are international in nature, such as the one-time transition tax, base erosion anti-abuse tax and the global intangible low-taxed income tax, and thus would not pertain to the Company as it has no international operations.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 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. During the fourth quarter ended December 31, 2018 the Company completed the accounting of certain income tax effects upon filing of the U.S. corporate income tax return. As a result, the Company recorded an insignificant amount of income tax expense to complete its accounting for The Tax Act, allowed under SAB 118.
Note 11 Benefit Plans and Collective Bargaining Agreements
The Company has a 401(k) Employee Stock Ownership Plan (the "401(k)/ESOP Plan") covering all non-union employees. Employees could contribute to the 401(k)/ESOP Plan up to
100 percent
of their wages with a maximum of
$18,500
for
2018
. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age
50
or older could contribute an additional
$6,000
per year for a maximum of
$24,500
for
2018
. Contributions by the employees are invested in one or more funds at the direction of the employee; however, employee contributions cannot be invested in Company stock. For the year ended December 31, 2015, contributions by the Company were made in cash and then used by the 401(k)/ESOP Plan Trustee to purchase Company stock. Effective January 1, 2016, contributions by the Company are made in accordance with the investment elections made by each participant for his or her deferral contributions. The Company contributes on behalf of each eligible participant a matching contribution equal to a percentage determined each year by the Board of Directors. For
2018
,
2017
and
2016
the maximum was
100 percent
of employee contributions up to a maximum of
four percent
of their eligible compensation. The matching contribution is applied to the employee accounts after each payroll. Matching contributions of approximately
$694,795
,
$608,473
and
$516,991
were made for
2018
,
2017
and
2016
, respectively. The Company may also make a discretionary contribution, which if made, would be distributed to all eligible participants regardless of whether they contribute to the 401(k)/ESOP Plan.
No
discretionary contributions were made to the 401(k)/ESOP Plan in
2018
,
2017
or
2016
.
The Company also has a 401(k) and Profit Sharing Plan (the "Bristol Plan") covering all employees as part of the United Steel Workers of America, Local Union 4586 Collective Bargaining Agreement (" Bristol CBA"). Employees could contribute to the Bristol Plan up to
60 percent
of pretax annual compensation, as defined in the Bristol Plan, with a maximum of
$18,500
for
2018
. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age
50
or older could contribute an additional
$6,000
per year for a maximum of
$24,500
for
2018
. The Company contributes
three percent
of a participant's eligible compensation for the plan year, regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were
$215,778
,
$174,229
and
$136,763
for
2018
,
2017
and
2016
, respectively. Additional profit sharing amounts may also be contributed at the option of the Company's Board of Directors, which if made, would be allocated to participants based on the ratio of the participant's compensation to the total compensation of all participants eligible to participate in the Bristol Plan.
No
discretionary contributions were made to the Bristol Plan in
2018
,
2017
or
2016
.
In connection with the MUSA-Stainless acquisition discussed in Note 18, the Company assumed the rights and obligations pursuant to the Collective Bargaining Agreement (the "Munhall CBA") between MUSA and the United Steel Workers of America, Local Union 5852-22 (the " Munhall Union"). As a part of this Munhall CBA, the Company assumed the obligation of participating in the Steelworkers Pension Trust, a union-sponsored multi-employer defined benefit plan (the "Munhall Plan"), which covers all the Company's eligible Munhall Union employees. The Munhall Plan has a calendar plan year. Per the most recent available annual funding notice, the plan was at least
80 percent
funded for the plan year ended
December 31, 2017
. Per the terms of the Munhall CBA the Company contributes
4 percent
of each participant's eligible compensation for the 2018 plan year. Munhall Union employees make no contributions to the Munhall Plan. The Company's contributions are less than
5 percent
of total contributions to the plan based on contributions for the plan year ended December 31, 2016. The Company's contributions to the Munhall Plan totaled
$129,403
and
$69,245
for the years ended
December 31, 2018
and December 31, 2017, respectively. Additionally, as part of the Munhall CBA, members of the union are eligible to make deferral contributions to the Company's 401(k)/ESOP Plan per the plan guidelines; however they do not receive matching contributions of the 401(k)/ESOP Plan.
The Company also maintains a Collective Bargaining Agreement ( the "Mineral Ridge CBA") with the United Steel Workers of America, Local Union 4564-07, which represents employees at the Specialty-Mineral Ridge facility. In connection with the Mineral Ridge CBA, the Company contributes to union-sponsored defined contribution retirement plans. Contributions relating to these plans were approximately
$32,034
,
$29,042
and
$22,256
for
2018
,
2017
and
2016
, respectively.
Note 12 Leases
On August 31, 2016, the Company and its operating subsidiaries (collectively the "Synalloy Companies") entered into a Purchase and Sale Agreement ("PSA") with Store Capital Acquisitions, LLC, a Delaware limited liability company and an affiliate of Store Capital Corporation (“Store”). Store Capital Acquisitions assigned its rights under the PSA to Store Funding prior to closing.
On September 30, 2016, pursuant to the terms and conditions of the PSA, the Synalloy Companies completed the sale of their real estate properties in Tennessee, South Carolina, Texas and Ohio to Store Funding for a purchase price of
$22,000,000
. The net book value of the real estate properties sold totaled
$17,769,883
and the Company recognized a loss on the sale of certain locations of
$2,455,347
. The Company also recognized a deferred gain of
$6,685,464
on the sale of certain locations which is being amortized on the straight-line method over the initial lease term of
20 years
. The deferred gain recognized during the fourth quarter of 2016 totaled
$83,568
and reduced the net loss recognized at December 31, 2016 in the accompanying consolidated statements of operations to
$2,371,778
. The deferred gain in each of the years ended 2018 and 2017 was
$334,273
. Concurrent with the sale of its real properties, the Company leased back all real properties sold to Store Funding pursuant to a Master Lease Agreement dated September 30, 2016 (the "Master Lease"). The closing of the sale-leaseback transaction provided the Company with net proceeds
(after transaction-related costs) of
$21,925,000
. The net proceeds were used to pay down debt under the Company's Credit Agreement, as described in Note 5.
The initial non-cancellable term of the lease was
20 years
, with
two
renewal options of
10 years
each. The lease includes a rent escalator equal to the lesser of
1.25
times the percentage increase in the Consumer Price Index since the previous increase or
two percent
. The lease met the operating lease requirements and has been accounted for as such.
On June 29, 2018, the Company and Store Funding amended and restated the Master Lease, pursuant to which the Company will lease the Munhall, PA facility, purchased by Store from MUSA on June 29, 2018, for the remainder of the initial term of
20 years
set forth in the Master Lease, with
two
renewal options of
10 years
each. The amended Master Lease includes a rent escalator equal to the lesser of
1.25
times the percentage increase in the Consumer Price Index since the previous increase or
two percent
.
The Company leases office space in Spartanburg, South Carolina and Richmond, Virginia, property for a storage yard in Mineral Ridge, Ohio, manufacturing and warehouse space in Munhall, Pennsylvania and various manufacturing and office equipment at each of its locations, all under operating leases.
The amount of future minimum lease payments under operating leases are as follows:
|
|
|
|
2019
|
3,207,053
|
|
2020
|
3,243,694
|
|
2021
|
3,238,745
|
|
2022
|
3,224,810
|
|
2023
|
3,102,815
|
|
Thereafter
|
45,337,403
|
|
Rent expense related to operating leases was
$3,994,012
,
$3,339,600
and
$1,143,895
in
2018
,
2017
and
2016
, respectively.
The Company leases machinery and equipment for its manufacturing facilities in Cleveland, Tennessee and Andrews, Texas under capital leases. Future minimum commitments for capital leases are as follows:
|
|
|
|
|
2019
|
$
|
354,299
|
|
2020
|
357,733
|
|
2021
|
346,570
|
|
2022
|
18,407
|
|
2023
|
—
|
|
Total minimum lease payments
|
1,077,009
|
|
Less imputed interest costs
|
164,826
|
|
Present value of net minimum lease payments
|
$
|
912,183
|
|