Annual report pursuant to Section 13 and 15(d)

Acquisitions

v3.8.0.1
Acquisitions
 12 Months Ended
Dec. 31, 2017
Business Combinations [Abstract]  
Purchase of Palmer of Texas
Acquisitions
Acquisition of the Stainless Steel Pipe and Tube Assets of Marcegaglia USA, Inc.
On December 9, 2016, the Company's subsidiary Bristol Metals, LLC ("BRISMET"), entered into a definitive agreement to acquire the stainless steel pipe and tube assets of MUSA located in Munhall, PA (the "Bristol Metals-Munhall") to enhance its on-going business with additional capacity and technological advantages. The transaction closed on February 28, 2017 and was funded through an increase to the Company's credit facility (See Note 5). The purchase price for the transaction, which excludes real estate and certain other assets, totaled $14,953,513. The assets purchased from MUSA include inventory, production and maintenance supplies and equipment less specific identified liabilities to be assumed. In accordance with the agreement, on December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. The deposit was remitted to MUSA at the close of the transaction and was reflected as a credit against the purchase price.
A summary of sources and uses of proceeds for the acquisition is as follows:
Sources of funds:
 
Borrowings from revolving line of credit
$
14,953,513

Total sources of funds
$
14,953,513

 
 

Uses of funds:
 

Acquisition of MUSA Stainless assets
$
14,953,513

Total uses of funds
$
14,953,513


The transaction was accounted for using the acquisition method of accounting for business combinations. During the fourth quarter of 2017, the Company finalized the purchase price allocation for the Bristol Metals-Munhall acquisition.
MUSA will receive quarterly earn-out payments for a period of four years years following closing. Aggregate earn-out payments will be at least $3,000,000, with no maximum. Actual payouts will equate to three percent of BRISMET’s incremental revenue, if any, from the amount of small diameter stainless steel pipe and tube (outside diameter of ten inches or less) sold. At February 28, 2017, the acquisition date, the Company forecasted earn out payments to be $4,063,204, which was discounted to a present value of $3,604,330 using a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, the credit risk associated with the payment of the earn-out and the methodology to quantify the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped.
In the second quarter of 2017, Management adjusted the selling price used in the earn-out calculation associated with the MUSA acquisition. Since this adjustment was determined within the measurement period, the beginning earn-out liability and goodwill were increased by $1,059,453. Goodwill related to Bristol Metals-Munhall increased from $3,589,342 to $4,648,795 and the fair value on contingent consideration was increased from $3,604,330 to $4,663,783. All other changes in fair value have been included as other (income) loss on the Company's consolidated statements of operations.
The total purchase price was allocated to Bristol Metals-Munhall facility's net tangible and identifiable intangible assets based on their estimated fair values as of February 28, 2017. The fair value assigned to the customer list intangible is being amortized on an accelerated basis over 15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets and liabilities is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining laser mill capabilities acquired as part of Bristol Metals-Munhall with BRISMET's 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.

The following table shows the initial estimate of value and revisions made during 2017:
 
Initial
 
 
 
 
 
estimate
 
Revisions
 
Final
Inventories
$
5,434,000

 
$
—

 
$
5,434,000

Other current assets - production and maintenance supplies
1,548,701

 
—

 
1,548,701

Equipment
7,576,733

 
—

 
7,576,733

Customer list intangible
992,000

 
—

 
992,000

Goodwill
3,589,342

 
1,059,453

 
4,648,795

Earn-out liability
(3,604,330
)
 
(1,059,453
)
 
(4,663,783
)
Other liabilities assumed
(582,933
)
 
—

 
(582,933
)
 
$
14,953,513

 
$
—

 
$
14,953,513


Bristol Metals-Munhall's results of operations since acquisition are reflected in the Company's consolidated statements of operations. The amount of Bristol Metals-Munhall's revenues and operating loss included in the consolidated statements of operations for the year ended December 31, 2017 was $25,766,689 and $245,408, respectively. The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's operations with Bristol Metals-Munhall as if the acquisition had occurred on January 1, 2016. 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 (Unaudited)
 
2017
 
2016
Pro-forma revenues
$
206,071,634

 
$
161,591,159

Pro-forma net income (loss)
1,441,258

 
(9,730,841
)
Earnings (loss) per share:
 
 
 
   Basic
0.17

 
(1.12
)
   Diluted
0.17

 
(1.12
)

The pro-forma calculation excludes non-recurring acquisition costs of $698,587 which were incurred by the Company during 2017. The stainless steel operations of MUSA's historical financial results were adjusted for both years to eliminate interest expense charged by the prior owner. Pro-forma net income was reduced for both years for the amount of amortization on Bristol Metal Munhall's customer list intangible and an estimated amount of interest expense associated with the additional line of credit borrowings.