Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.19.2
Acquisitions
 6 Months Ended
Jun. 30, 2019
Business Combinations [Abstract]  
Acquisitions
Acquisitions
Acquisition of the Assets and Operations of American Stainless Tubing, Inc.
On January 1, 2019, the Company's wholly-owned subsidiary, ASTI Acquisition, LLC, a North Carolina limited liability company (“ASTI”), completed the purchase of substantially all of the assets and operations of American Stainless Tubing, Inc., a North Carolina corporation ("American Stainless"), in Statesville and Troutman, North Carolina. The purchase price for the all-cash acquisition was $21,895,409, subject to a post-closing working capital adjustment. The Company funded the acquisition with a new five-year $20,000,000 term note and a draw against asset-based line of credit (see Note 10).
The transaction is 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 and liabilities assumed. Accordingly, the allocation of the consideration transferred in the unaudited condensed consolidated financial statements is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. Such adjustments could be significant. The final valuation is expected to be completed as soon as practicable but no later than twelve months after the closing date of the acquisition.
The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining American Stainless' production capabilities with the Metals Segment current operations. All of the goodwill recognized was assigned to the Company's Metals Segment and is expected to be deductible for income tax purposes.
American Stainless will receive quarterly earn-out payments for a period of three years following closing. Pursuant to the asset purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. 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.
During the second quarter of 2019, management revised the initial estimate of the fair value of the contingent consideration, resulting in an increase to the earn-out liability of $218,094. Because this adjustment was determined within the measurement period, goodwill was increased by $218,094. At June 30, 2019 the fair value of the contingent consideration totaled $6,011,745 with $2,802,828 of this liability classified as a current liability since the payments will be made quarterly.
The fair value assigned to the customer list intangible will be amortized on an accelerated basis over 15 years. During the second quarter of 2019, management revised the initial estimate of the fair value of the customer list intangible asset, resulting in a decrease to the customer list intangible asset of $496,000. Because this adjustment was determined within the measurement period, goodwill was increased by $496,000.
The following table shows the initial estimate of value as reported at March 31, 2019 and revisions made during the second quarter of 2019:
 
Initial estimate
 
Revisions
 
Revised estimate
Inventories
$
5,564,000

 
$
—

 
$
5,564,000

Accounts receivable
3,533,921

 
—

 
3,533,921

Other current assets - production and maintenance supplies
605,613

 
—

 
605,613

Property, plant and equipment
2,793,173

 
—

 
2,793,173

Customer list intangible
10,000,000

 
(496,000
)
 
9,504,000

Goodwill
7,043,534

 
714,094

 
7,757,628

Contingent consideration (earn-out liability)
(6,148,230
)
 
(218,094
)
 
(6,366,324
)
Accounts payable
(1,400,009
)
 
—

 
(1,400,009
)
Other liabilities
(96,593
)
 
—

 
(96,593
)
 
$
21,895,409

 
$
—

 
$
21,895,409


ASTI's results of operations since acquisition are reflected in the Company's consolidated statements of operations as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019

 
June 30, 2019

Net sales
$
8,557,027

 
$
18,070,247

Income before income taxes
992,041

 
1,099,163



For the three and six-month periods ended June 30, 2019, cost of sales included $1,147,000 representing the fair value above predecessor cost associated with acquired inventory that was sold during the quarter.

The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's operations with ASTI as if the acquisition had occurred on January 1, 2018. The unaudited pro-forma financial information is for information purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed on the date indicated above.
Pro-Forma
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018

 
June 30, 2018

Pro-forma net sales
$
81,083,582

 
$
148,090,359

Pro-forma net income
$
3,776,621

 
$
6,984,743

Earnings per share:
 
 
 
   Basic
$
0.43

 
$
0.80

   Diluted
$
0.42

 
$
0.79


Pro-forma net income was reduced for the following:
•
Amortization of American Stainless’ customer list intangible of $281,499 and $594,000 for the three and six months June 30, 2018, respectively;
•
Additional rent expense related to the Company’s lease of American Stainless’ real estate from Store Capital of $121,450 and $242,899 for the three and six months ended June 30, 2018, respectively;
•
An estimated amount of interest expense associated with the additional borrowings to fund the American Stainless acquisition of $201,192 and $412,162 for the three and six months ended June 30, 2018, respectively;
•
Depreciation of $71,150 and $112,402 for the three and six months ended June 30, 2018, respectively, related to the incremental fair value above historical cost for acquired property, plant and equipment; and
•
A increase in the provision for income taxes for the three months ended June 30, 2018 and a decrease in the provision for income taxes of $143,013 for the six months ended June 30, 2018 related to the impact of the other pro-forma adjustments and American Stainless' previous status as a pass-through entity for income tax purposes prior to the acquisition.
Acquisition of the Galvanized Pipe and Tube Assets of Marcegaglia USA, Inc.
On July 1, 2018, Bristol Metals, LLC ("BRISMET"), a subsidiary of the Company's Metals Segment, acquired Marcegaglia USA, Inc.'s ("MUSA") galvanized tube assets and operations ("MUSA-Galvanized") located in Munhall, PA. The purchase price for the transaction totaled $10,378,281. The assets purchased and liabilities assumed from MUSA include accounts receivable, inventory, equipment, and accounts payable.