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Acquisitions | 12 Months Ended
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Jan. 03, 2015
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 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 views 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, subject to working capital adjustments post-closing. Davidson has the potential to receive earn-out payments up to a total of $5,000,000 if Specialty achieves targeted sales revenue over a two-year period following closing. At the end of each year (based on the acquisition date) for the next two years, if Specialty's revenues for the year is greater than $27,000,000 for the year, the seller of Specialty will 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 will be paid for any year where revenue is less than or equal to $27,000,000. If the cumulative revenue for the earn-out periods is greater than $58,000,000, the Company will make an additional earn-out payment so that the total cumulative earn-out payments equals 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. The Company is currently forecasting earn-out payments totaling $5,000,000, which was discounted to a present value of $4,774,000 using our incremental borrowing rate of three percent. The various assumptions and projections used in the earn-out projections were reviewed at January 3, 2015 with no additional adjustments required. Any future changes to the projected earn-out payments as a result of our quarterly review of the forecasted revenues would be reflected as an adjustment to earnings in that period. 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 3. A summary of sources and uses of proceeds for the acquisition of Specialty is 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 a 10-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 current 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 |
Contingent consideration | — |  |  | (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. Contingent consideration is the present value of the projected earn-out payments to Davidson. 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.
Pro-Forma (Unaudited)
| 2014 |  | 2013
Pro-forma revenues from continuing operations | $ | 228,647,000 |  |  | $ | 224,570,000 |
Pro-forma net income from continuing operations | 8,928,000 |  |  | 6,459,000 |
Earnings per share from continuing operations: |  |  |
Basic | $ | 1.85 |  |  | $ | 0.93 |
Diluted | $ | 1.85 |  |  | $ | 0.93 |
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. Acquisition of Color Resources, LLC In August 2013, the Company completed the purchase of substantially all of the assets of CRI and the CRI Facility. CRI Tolling, a South Carolina limited liability company and wholly-owned subsidiary of the Company, will continue CRI’s business as that of a toll manufacturer that provides outside manufacturing resources to global and regional chemical companies. On August 9, 2013, Synalloy purchased the CRI Facility for a total purchase price of $3,450,000. On August 26, 2013, the Company purchased certain assets and assumed certain operating liabilities of CRI through CRI Tolling for a total purchase price of $1,100,000. The assets purchased from CRI included accounts receivable, inventory, certain other assets, and equipment, net of assumed payables. The Company used the acquisition of CRI and the CRI Facility to expand its production capacity from MC's Cleveland, Tennessee facility to further penetrate existing markets, as well as develop new ones, including those in the energy industry. CRI Tolling operates as a division of the Company’s Specialty Chemicals Segment, which includes MC. The Company viewed both the building and operating assets of CRI together as one business, capable of providing a return to ownership by expanding the segment's production capacity. Accordingly, the acquisition meets the definition of a business and the transaction is structured in a way it that meets the definition of a business combination under in accordance with FASB Accounting Standards Codification 805, Business Combinations. The purchase price for the acquisition of CRI and the CRI Facility was funded through a new term loan with the Company’s bank which is discussed in Note 3 along with an increase in the Company’s line of credit. A summary of sources and uses of proceeds for the acquisition of CRI and the CRI Facility is as follows:
Sources of funds: |
Proceeds from term loan | $ | 4,033,250 |
Proceeds from line of credit | 516,750 |
Total sources of funds | $ | 4,550,000 |
Uses of funds: |  |
Acquisition of CRI Facility | $ | 3,450,000 |
Acquisition of certain CRI assets, net of assumed liabilities | 1,100,000 |
Amount received by Company for pro-rated property taxes at close | $ | (22,000 | )
Total uses of funds | $ | 4,528,000 |
The total consideration transferred was allocated to CRI’s net tangible and identifiable assets based on their fair value as of August 26, 2013. The allocation of the total consideration to the fair value of the assets acquired and liabilities assumed as of August 26, 2013 is as follows:
| As recorded by CRI |  | Purchased CRI Facility |  | Purchase accounting and fair value adjustments |  | As recorded by Synalloy
Accounts receivable, net | $ | 623,539 |  |  | $ | — |  |  | $ | — |  |  | $ | 623,539 |
Inventories, net | 232,771 |  |  | — |  |  | — |  |  | 232,771 |
Prepaid expenses | 11,695 |  |  | — |  |  | — |  |  | 11,695 |
Building and land | — |  |  | 3,450,000 |  |  | 650,000 |  |  | 4,100,000 |
Equipment, net | 614,998 |  |  | — |  |  | 1,028,082 |  |  | 1,643,080 |
Accounts payable | (365,898 | ) |  | — |  |  | — |  |  | (365,898 | )
Accrued liabilities | (17,105 | ) |  | — |  |  | — |  |  | (17,105 | )
Deferred tax liability | — |  |  | — |  |  | (600,750 | ) |  | (600,750 | )
| $ | 1,100,000 |  |  | $ | 3,450,000 |  |  | $ | 1,077,332 |  |  | $ | 5,627,332 |
Due to severe financial difficulties CRI was experiencing prior to the acquisition, the Company was able to purchase the land, building and equipment at below market value. Therefore, the overall fair value of the assets acquired by the Company exceeded the amount paid. Upon the determination that the Company was going to recognize a gain related to the bargain purchase of CRI and the CRI Facility, the Company reassessed its assumptions and measurement of identifiable assets acquired and liabilities assumed and concluded that the preliminary valuation procedures and resulting measures were appropriate. Due to the bargain purchase accounting rules, a one-time gain, net of taxes, was recognized during year ended December 28, 2013 as follows:
Fair value of net assets acquired | $ | 5,627,332 |
Total consideration paid | (4,550,000 | )
Bargain purchase gain, net of taxes | $ | 1,077,332 |
The amount of CRI’s revenues and pre-tax earnings included in the Consolidated Statements of Operations for the year ended December 28, 2013 was $1,824,000 for revenues and $144,000 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 CRI as if the acquisition had occurred on January 1, 2012. The unaudited pro forma financial information is for informational 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)
| 2013 |  | 2012
Pro forma revenues | $ | 223,969,000 |  |  | $ | 204,850,000 |
Pro forma net income | 1,230,000 |  |  | 3,599,000 |
Earnings per share: |  |  |
Basic | $ | 0.18 |  |  | $ | 0.57 |
Diluted | $ | 0.18 |  |  | $ | 0.56 |
The pro-forma calculation excludes non-recurring acquisition costs of $255,000 during 2013. These expenditures included $113,000 for professional audit fees associated with the audit of CRI's historical financial statements and the valuation of assets acquired, $70,000 related to bank fees associated with the swap agreement, $53,000 of legal fees and other various charges of $19,000. These expenses were all recorded at the corporate level and are included as a separate line item in the consolidated statements of operations. Acquisition of Palmer of Texas On August 21, 2012, the Company completed the purchase of all of the outstanding shares of capital stock of Palmer. Palmer is a manufacturer of liquid storage solutions and separation equipment for the petroleum, municipal water, wastewater, chemical and food industries. The Company viewed the Palmer acquisition as an excellent complement to the Metals Segment as both companies service many of the same markets and the Company has the ability to drive Palmer efficiencies in purchasing and operations. Palmer's results of operations since the acquisition date are reflected in the Company's consolidated statements of operations, and the Palmer acquisition added approximately 130 employees at December 29, 2012. Effective January 22, 2013, Lee-Var, Inc. changed its name to Palmer of Texas Tanks, Inc. The purchase price for the acquisition was $25,575,000. The adjustment for working capital increased the purchase price to $26,951,209. In addition, the amount of maintenance expenditures over the 18-month period following closing and the final cost of a production expansion capital project currently underway could also result in purchase price adjustments. Currently, the Company does not expect to realize any material purchase price adjustments from these two items. The sellers of Palmer will also have the ability to receive earn-out payments ranging from $2,500,000 to $10,500,000 if the business unit achieves targeted levels of Adjusted EBITDA, as defined in the SPA, over a three year period following closing; and the Company will have the ability to claw-back portions of the purchase price over a two-year period following closing if Adjusted EBITDA falls below baseline levels. Palmer had recorded liabilities of approximately $1.2 million related to certain contingencies for which the former Palmer shareholders have agreed to indemnify the Company. Accordingly, the Company has carried over these liabilities in its consolidated financial statements and has recorded an asset of approximately $1.2 million in prepaid expenses reflecting the indemnification against these potential payments. During 2013, several of the identified contingency items were resolved and the amount of prepaid expenses for these indemnified contingencies decreased to $336,000 at the end of 2013. At the end of each year (based on the acquisition date) for the three years after the acquisition, if Palmer's Adjusted EBITDA for the year is below $5,825,000, there will not be an earn-out paid for that year. If Adjusted EBITDA for the year is greater than $5,825,000 but less than $6,825,000, the sellers of Palmer will be paid $2,500,000 for that year. If Adjusted EBITDA exceeds $6,825,000 for the year, the earn-out would be $3,500,000. At the conclusion of the three-year earn-out period, in the event that the cumulative Adjusted EBITDA for the earn-out period is more than $17,475,000, the sellers of Palmer will receive an additional earn-out payment, if any, as follows. In the event that the cumulative Adjusted EBITDA for the earn-out period is greater than $17,475,000 but less than $20,475,000, the Company will make an additional earn-out payment so that the total cumulative earn-out payments for the three-year earn-out period equals $7,500,000. If the cumulative Adjusted EBITDA exceeds $20,475,000, the Company will make an additional earn-out payment so that the total cumulative earn-out payments for the three-year period equals $10,500,000. At acquisition, the Company forecasted earn-out payments totaling $8,500,000, which was discounted to a present value of $8,152,000 using its incremental borrowing rate of two percent. The first year earn-out of $2,500,000 (before the downward adjustment for indemnification claims) was paid in 2013, leaving an earn-out liability balance of $6,000,000 at the end of 2013. As discussed in Note 1, during the three months ended June 28, 2014, the Company reviewed the Palmer earn-out reserve for the second and third year payments and determined the EBTIDA threshold target of $5,825,000 for Year 2 would not be attained, and therefore, the earn-out payment of $2,500,000 for Year 2 was not made to the former Palmer shareholders. As a result, the Company recognized a gain of approximately $3,476,000 for adjusting the earn-out liability to the present value of the Company's current estimates. The Company does not expect Palmer to meet the EBITDA threshold target of $6,825,000 during the final twelve month earn-out period; however, it should reach the $5,825,000 threshold for year three. Any future changes to the projected earn-out payments as a result of our quarterly review of forecasted Adjusted EBITDA would be reflected as an adjustment to earnings in that period. The purchase price for the Palmer acquisition was funded through an increase in the Company's current credit facility and a new term loan with the Company's bank which is discussed in Note 3. The total purchase price was allocated to Palmer's net tangible and identifiable assets based on their estimated fair values as of August 21, 2012. An intangible asset representing the fair value of Palmer's customer base acquired by the Company was valued at $9,000,000, which is being amortized over a 15-year period using an accelerated amortization method. The excess of the consideration transferred over the fair value of the net tangible and identifiable assets and intangible assets is reflected as goodwill. The Company believes the amount of goodwill resulting from the purchase price allocation is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable asset) and the expected synergistic benefits of being able to leverage Palmer's expertise with the Company's existing manufacturing processes. All of the goodwill was allocated to the Metals Segment. Since the Company purchased the stock of Palmer, goodwill is not deductible for tax purposes. The allocation of the total consideration paid to the fair value of the assets acquired and liabilities assumed was as follows:
| As recorded by Palmer |  | Purchase accounting and fair value adjustments |  | As recorded by Synalloy
Cash and cash equivalents | $ | 1,389,054 |  |  | $ | — |  |  | $ | 1,389,054 |
Accounts receivable, net | 4,969,030 |  |  | — |  |  | 4,969,030 |
Inventories, net | 5,678,368 |  |  | — |  |  | 5,678,368 |
Prepaid expenses | 75,804 |  |  | 1,536,000 |  |  | 1,611,804 |
Net fixed assets | 4,799,692 |  |  | 2,691,370 |  |  | 7,491,062 |
Goodwill | — |  |  | 15,897,948 |  |  | 15,897,948 |
Intangible asset - customer base | — |  |  | 9,000,000 |  |  | 9,000,000 |
Contingent consideration | — |  |  | (8,152,031 | ) |  | (8,152,031 | )
Other liabilities assumed | (6,833,315 | ) |  | (3,156,711 | ) |  | (9,990,026 | )
| $ | 10,078,633 |  |  | $ | 17,816,576 |  |  | $ | 27,895,209 |
The purchase accounting and fair value adjustment for prepaid expenses represents the indemnification provided by the sellers of Palmer for certain liabilities assumed at acquisition, as mentioned earlier in this note, plus the Controller's retention bonus. The adjustment for net fixed assets increased the book value of the property, plant and equipment to their estimated fair value as of the acquisition date. Contingent consideration is the present value of projected earn-out payments to the prior owners of Palmer. The majority of the adjustments to other liabilities assumed represents current and deferred income taxes inherent with the acquisition. The amount of Palmer's revenues and pre-tax earnings included in the consolidated statements of operations for the year ended December 29, 2012 was $12,619,000 for revenues and $977,000 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 Palmer as if the acquisition had occurred on January 2, 2011. 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)
| 2012 |  | 2011
Pro forma revenues | $ | 220,955,000 |  |  | $ | 202,689,000 |
Pro forma net income | 5,537,000 |  |  | 6,478,000 |
Earnings per share: |  |  |  |  |
Basic | $ | 0.87 |  |  | $ | 1.03 |
Diluted | 0.87 |  |  | 1.02 |
The pro-forma calculation excludes non-recurring acquisition costs of $881,000 during 2012. These expenditures included $355,000 for professional audit fees associated with due diligence, preparation and audit of historical financial statements and intangible asset identification and valuation, $337,000 related to bank fees associated with the swap agreement, $93,000 of legal fees, $25,000 of travel costs and other various charges of $71,000. These expenses were all recorded at the corporate level and are included as a separate line item in the consolidated statements of operations

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1383-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4922-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4934-128472 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4926-128472 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1392-128463 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1486-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1497-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1490-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4845-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1500-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1524-128463 + Details
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