Annual report pursuant to Section 13 and 15(d)

Acquisitions

v3.6.0.2
Acquisitions
 12 Months Ended
Dec. 31, 2016
Business Combinations [Abstract]  
Purchase of Palmer of Texas
Acquisitions

Acquisition of Specialty Pipe & Tube, Inc.
On November 21, 2014, the Company entered into a stock purchase agreement with The Davidson Corporation, a Delaware corporation ("Davidson") to purchase all of the issued and outstanding stock of Specialty. Established in 1964 with distribution centers in Mineral Ridge, Ohio and Houston, Texas, Specialty is a master distributor of seamless carbon pipe and tube, with a focus on heavy wall, large diameter products. The Company viewed the Specialty acquisition as an excellent complement to the product offerings of the Metals Segment with similar end markets and consistent profit margins. Specialty's results of operations since the acquisition date are reflected in the Company's consolidated statements of operations, and the Specialty acquisition added approximately 30 employees at January 3, 2015.
The purchase price for the all-cash acquisition was approximately $31,500,000. Davidson had the potential to receive earn-out payments up to a total of $5,000,000 if Specialty achieved targeted sales revenue over a two-year period following closing. At the end of each year (based on the acquisition date) for the following two year periods, if Specialty's revenues for a year were greater than $27,000,000, the seller of Specialty would be paid the product of the amount of revenue during the year in excess of $27,000,000, as a percentage of $2,000,000, multiplied by $2,500,000, not to exceed $2,500,000. No earn-out payment would be paid for any year where revenue was less than or equal to $27,000,000. If the cumulative revenue for the earn-out periods was greater than $58,000,000, the Company would make an additional earn-out payment so that the total cumulative earn-out payments equaled the product of the amount of cumulative revenue for all earn-out periods in excess of $54,000,000, as a percentage of $4,000,000, multiplied by $5,000,000, not to exceed a total cumulative earn-out payment of $5,000,000.
At acquisition, the Company preliminarily forecasted earn-out payments totaling $5,000,000, which was discounted to a present value of $4,774,000 using its incremental borrowing rate of three percent. As discussed in Note 2, during the three months ended July 4, 2015, the Company finalized its sales projections for Specialty and determined the revenue targets for the first year would not be met and the opening balances for the earn-out liability and goodwill were adjusted by $2,419,000. The impact of the declines experienced in West Texas Intermediate Prices ("WTI") oil prices, which decreased 31 percent during 2015, had a substantial effect on Specialty. Revenues declined by more than 35 percent during 2015 compared to 2014 revenue levels. The Company did not expect significant improvement in WTI prices during 2016 and adjusted its 2016 projections accordingly. As a result, during the three months ended October 3, 2015, the Company determined the fair value of the Specialty earn-out liability was zero and reduced the remaining earn-out liability by recognizing a gain of approximately $2,414,000. The Company reviewed Specialty's revenue projections at December 31, 2015 and again concluded that the fair value was zero. The estimated fair value of the Specialty earn-out liability remained at zero during 2016 and the earn-out period expired November 22, 2016 with no payment made during the year ended December 31, 2016. The financial results for Specialty are reported as a part of the Company's Metals Segment.
The purchase price for the acquisition was funded through a combination of cash on hand, a new term loan with the Company's bank and an increase to the Company's current credit facility which is discussed in Note 5.
A summary of sources and uses of proceeds for the acquisition of Specialty was as follows:
Sources of funds:
 
Cash on hand
$
21,490,433

Proceeds of term loan
10,000,000

Total sources of funds
$
31,490,433

 
 

Uses of funds:
 

Acquisition of Specialty's common stock
$
27,496,000

Cash paid to escrow agent for potential future claims, to be settled within 18 months
3,248,500

Cash paid for a portion of the seller's investment banker fee
745,933

Total uses of funds
$
31,490,433


The total purchase price was allocated to Specialty's net tangible and identifiable assets based on their fair values as of November 21, 2014. An intangible asset representing the fair value of Specialty's customer base acquired by the Company was valued at $11,457,000, which is being amortized by the straight-line method over an eight-year period. The excess of the consideration transferred over the fair value of the net tangible and identifiable assets and intangible assets is reflected as goodwill. All of the goodwill was allocated to the Metals Segment. Since the Company treated the acquisition of Specialty as an asset purchase, goodwill will be deductible for tax purposes. The initial allocation of the total consideration paid to the fair value of the assets acquired and liabilities assumed is as follows:
 
As recorded by Specialty
 
Purchase accounting and fair value adjustments
 
As recorded by Synalloy
Cash
$
12,960

 
$
—

 
$
12,960

Accounts receivable, net
2,827,251

 
—

 
2,827,251

Inventories, net
17,041,660

 
(1,516,888
)
 
15,524,772

Fixed assets
3,018,416

 
(67,924
)
 
2,950,492

Goodwill
—

 
5,993,705

 
5,993,705

Intangible asset - customer base
—

 
11,457,000

 
11,457,000

Earn-out liability
—

 
(4,773,620
)
 
(4,773,620
)
Other liabilities assumed
(2,502,127
)
 
—

 
(2,502,127
)
 
$
20,398,160

 
$
11,092,273

 
$
31,490,433


The purchase accounting and fair value adjustments for fixed assets reduced the book value of the property and buildings to their estimated fair value as of the acquisition date. The earn-out liability is the present value of the projected earn-out payments to Davidson.
During the second quarter of 2015, the Company finalized the purchase price allocation for the Specialty acquisition. Additional information was obtained surrounding the proper lifespan of Specialty's steel pipe. As a result, the Company changed its fair value estimate for valuing inventory and the fair value of inventory increased and goodwill decreased by approximately $2,318,000. This adjustment and the adjustment to the earn-out liability describe above caused goodwill related to the Specialty acquisition to decrease to $1,260,000. During the fourth quarter, as discussed in Note 4, goodwill related to the Specialty acquisition was reduced to zero.
The amount of Specialty's revenues and pre-tax earnings included in the consolidated statements of operations for the year ended January 3, 2015 was $2,524,000 for revenues and $493,000 for pre-tax earnings. The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's operations with Specialty as if the acquisition had occurred on December 30, 2012. 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.
 
2014
Pro-forma revenues from continuing operations
$
228,647,000

Pro-forma net income from continuing operations
8,928,000

Earnings per share from continuing operations:
 
   Basic
$
1.85

   Diluted
$
1.85


The pro-forma calculation excludes non-recurring acquisition costs of $302,000 which were incurred by the Company during 2014. These expenditures included $92,000 for professional audit fees associated with the audit of Specialty's historical financial statements, acquisition testing and intangible assets identification and valuation, $83,000 of legal fees, $65,000 of success based fees to a mergers and acquisition consultant and $62,000 of travel costs. Specialty's historical financial results were adjusted for both years to eliminate intangible asset amortization and management fees charged by the prior owner. Pro-forma net income was reduced for both years for the amount of amortization on Specialty's current customer list intangible and an estimated amount of interest expense associated with the five-year term loan and earn out liability.