Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2018
|Accounting Policies [Abstract]|
|Summary of Significant Accounting Policies||
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries and our majority-owned subsidiaries, in which we hold a controlling interest. All intercompany accounts and transactions are eliminated in consolidation. We use the equity method to account for investments in affiliated companies that are 20% to 50% owned where we do not hold a controlling voting interest and do not direct the matters that most significantly impact the investee’s operations.
We own an 80% interest in Olin Luotong (GZ) Corporation (“Olin Luotong Metals” or “OLM”), based in China, and Olin Luotong Metals’ financial information is consolidated herein, with the net results attributable to the 20% noncontrolling interest reflected in the accompanying consolidated financial statements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires us to make estimates and assumptions that affect the reported amount of net sales and expenses during the reporting period. Actual amounts could differ from those estimates.
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of our cash equivalents at December 31, 2018 approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of trade receivables for amounts billed to customers for products sold and other receivables. The determination of collectability of our accounts receivable requires us to make frequent judgments and estimates in order to determine the appropriate allowance needed for doubtful accounts. In circumstances where we are aware of a customer’s inability to meet its financial obligations (e.g., bankruptcy filings or substantial down-grading of credit ratings), we record an allowance for bad debts equal to the amount we believe is not collectible. For all other customers, we recognize allowances for bad debts based on historical collection experience. If circumstances change (e.g., greater than expected defaults or an unexpected material change in a major customer’s ability to meet its financial obligations), the estimate of the allowance could change by a material amount. Accounts are written off once deemed to be uncollectible.
Inventories include costs attributable to direct labor and manufacturing overhead but are primarily comprised of metal costs. The metals component of inventory is valued on a last-in, first-out (“LIFO”) basis, and comprised approximately 67% and 65% of total inventory at December 31, 2018 and 2017, respectively. All other inventory components, including the direct labor and manufacturing overhead components and certain non-U.S. inventories, are valued on a first-in, first-out (“FIFO”) basis. In addition to the cost of material, finished goods inventory includes costs for depreciation, utilities, consumable production supplies, maintenance, production wages and transportation.
Inventories are valued at the lower of cost or market. The market price of metals used in production and related scrap is subject to volatility. We evaluate the need to record adjustments to inventory values on a regular basis. During periods when open market prices decline below carrying value, we record a provision to reduce the carrying value of inventory. Additionally, we record an estimate for slow moving and obsolete inventory based upon product knowledge, physical inventory observation, future demand, market conditions and an aging analysis of the inventory on hand. Our policy is to include all types of inventory, including raw material, work-in-process, finished goods, and spare parts, in the evaluation of slow moving and obsolete reserves. Inventory in excess of estimated usage requirements is written down to its estimated net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We depreciate property, plant and equipment, which includes assets under capital leases, using the straight-line method based on the estimated useful lives of the assets as they are placed into service. Property, plant and equipment are generally depreciated over their useful lives as detailed in the notes to the accompanying consolidated financial statements. Depreciation expense is recorded in cost of sales or selling, general and administrative costs depending on the nature and use of the underlying asset.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures which improve an asset or extend its estimated useful life are capitalized. Interest costs related to the construction of qualifying assets are capitalized as part of the construction costs. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the accompanying consolidated statements of operations.
We review property, plant and equipment for impairment when a change in events or circumstances indicates that the carrying value of the assets may not be recoverable. We determine the fair value of our asset group through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals.
Acquisitions and Goodwill
All acquisitions are accounted for using the acquisition method as prescribed by ASC 805, Business Combinations. The purchase price paid is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill.
Goodwill is not amortized but is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We perform our annual goodwill impairment test as of October 31 and monitor for interim triggering events on an ongoing basis.
We utilized the qualitative goodwill evaluation model for our annual goodwill impairment test conducted as of October 31, 2018. Based on the results of that qualitative assessment, we believe it was more likely than not that the fair value of the reporting units exceeded their carrying values as of October 31, 2018, indicating no impairment of goodwill.
We record finite-lived intangible assets at fair value under the purchase method of accounting and amortize them over their useful lives using the straight-line method. We record amortization expense related to intangible assets in selling, general and administrative expenses. We review identifiable finite-lived intangible assets for impairment whenever events or circumstances indicate that their carrying values may not be recoverable. We do not have any indefinite-lived intangible assets as of December 31, 2018 or 2017. Accumulated amortization on intangible assets was $1.8 million and $1.4 million as of December 31, 2018 and 2017, respectively.
We expect to incur amortization expense related to intangible assets in subsequent years as follows:
Deferred Financing Fees
We amortize deferred financing fees incurred in connection with the issuance of debt as non-cash interest expense over the terms of the debt agreements. We present unamortized balances of deferred financing fees incurred in connection with the issuance of our long-term debt facilities in the noncurrent portion of debt in our consolidated balance sheets and amortize them using the effective interest method over the term of the debt facility. We present the unamortized balances of deferred financing fees incurred in connection with the issuance of our asset based loan facility in other noncurrent assets in our consolidated balance sheets and amortize them on a straight-line basis over the term of the facility.
Our operating activities expose us to a variety of market risks, including risks related to fluctuations in commodity prices, energy costs, foreign currency exchange rates, and interest rates. We monitor and manage these financial exposures as an integral part of our overall risk-management program. We do not enter into derivative contracts for speculation purposes where the objective is to generate profits. We use hedge accounting for our interest rate swap agreement that we entered into in May 2018. We did not apply hedge accounting to our commodity derivative contracts in 2018, 2017 or 2016. We include the fair value of our interest rate swap agreement and commodity derivative contracts as assets or liabilities in our consolidated balance sheet. For our interest rate swap agreement, the change in fair value is recorded to accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. For our commodity derivative contracts, we recognize all amounts paid and received and changes in fair value of the derivative contracts, including unrealized gains and losses, as adjustments to income in the accompanying consolidated statements of operations.
On July 31, 2018, our Board of Directors authorized a share repurchase program (the “2018 Share Repurchase Program”), authorizing us to repurchase up to $35.0 million of our common stock on the open market through September 30, 2020. We repurchased 400,000 shares of our common stock under the 2018 Share Repurchase Program during 2018. In addition to the 2018 Share Repurchase Program, we frequently buy shares of our common stock from employees as an accommodation to them to satisfy their tax withholding obligations under our stock compensation plans. Both the repurchased shares and shares bought from our employees are reflected at cost within treasury stock in the consolidated balance sheets.
We have one share-based compensation plan, which is described in Note 16, “Share-based Compensation.” Pursuant to this plan, we have granted non-qualified options, restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors. See Note 16, “Share-based Compensation” for further detail.
Revenue is measured based on the consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when performance obligations to our customers are satisfied. We recognize revenue upon transfer of control to our customers, which is generally the date the product is shipped. See Note 3, “Revenue” for further detail.
Estimates for rebates, returns and payment discounts are recognized in the period in which the corresponding revenue is recorded based on contractual values or historical experience. Such rebates were not material for 2018, 2017, or 2016.
Shipping and Freight
Billings to customers for shipping costs are included in net sales and the cost of shipping product to those customers is reflected in cost of sales in the accompanying consolidated statements of operations. We elect to account for the shipping costs incurred after transfer of control to the customer as fulfillment costs.
Provision for Income Taxes
We use the asset and liability approach to record our provision for income taxes. We measure our current and deferred income taxes payable by applying the provisions of enacted tax laws. Deferred income taxes are provided for temporary differences between the income tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. We record a valuation allowance to reduce deferred tax assets when we determine it is “more likely than not” that some portion or all of the deferred tax assets will not be realized.
Foreign Currency Translation
We translate the financial statements of our foreign subsidiaries into United States dollars in accordance with ASC 830, Foreign Currency Matters. The functional currency of our foreign subsidiaries is the local currency. We translate the consolidated statements of operations of our foreign operations at weighted-average exchange rates for the periods. We translate their assets and liabilities at period-end exchange rates and equity transactions at historical rates. Gains and losses resulting from the translation adjustment are reported as a component of other comprehensive income (loss). We record the income tax effect of currency translation adjustments related to foreign subsidiaries and joint ventures that are not considered indefinitely reinvested as a component of deferred taxes with an offset to other comprehensive income (loss).
Concentrations of Credit Risk and Certain Other Exposures
We sell and distribute our products to a wide range of companies primarily in the building and housing, munitions, automotive, transportation, coinage, electronics / electrical components and industrial machinery and equipment markets. We perform ongoing credit evaluations of our customers and generally do not require collateral. There was no customer that represented 10% or more of consolidated net sales in 2018, 2017, or 2016.
We use various strategies to minimize the impact of changes in the commodity metal prices between the date of order from a customer and the date of sale to a customer. Generally, we price a forward replacement purchase of an equivalent amount of copper and other metals under flexible pricing arrangements with our suppliers at the same time that we determine the forward selling price of finished products to our customers. We have various sources of raw materials and are not materially dependent on any one supplier.
As of December 31, 2018, approximately 54% of our employees at various sites were members of unions. Generally, our various agreements with unions in the United States have contractual terms which range from 3 to 5 years. Since our establishment in November 2007, we have not experienced any work stoppages at any of our facilities.
We are required to make contributions to the IAM National Pension Plan (“IAM Plan”), a multi-employer pension plan that covers certain of our union employees. Our obligations may be impacted by the plan’s funded status, investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions. In addition, if a participating employer becomes insolvent and ceases to contribute to a multiemployer plan, the unfunded obligation of the plan will be borne by the remaining participating employers. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan. Given the facts that the IAM Plan is 92% funded, many other participating employers are much larger than us, and the large number of participating employers in the plan, we do not view this to be a significant risk.
We are self-insured up to a retention amount for workers’ compensation claims and benefits paid under employee health care programs. Accruals for employee health care liabilities are primarily based on the estimated, undiscounted cost of claims, which includes claims incurred but not yet reported to us. We estimate liabilities for workers’ compensation benefits and related expenses for claims, in part, by considering historical claims experience and undiscounted claims estimates provided by insurance carriers, third-party administrators, and actuaries. Our accruals for self-insurance liabilities are sufficient to cover outstanding claims, including those incurred but not yet reported to us as of the estimation date.
Environmental Reserves and Environmental Expenses
We recognize an environmental liability when it is probable the liability exists and the amount is reasonably estimable. We estimate the duration and extent of our remediation obligations based upon internal analyses of clean-up costs, ongoing monitoring costs and estimated legal fees, communications with regulatory agencies and changes in environmental law. If we were to determine that our estimates of the duration or extent of environmental obligations were no longer accurate, we would adjust our environmental liabilities accordingly in the period that such determination is made. We do not discount estimated future expenditures for environmental remediation to their present value. Accrued environmental liabilities are not reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as a component of cost of sales in the accompanying consolidated statement of operations.
Recently Issued and Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU“) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service. ASU 2018-15 provides guidance on capitalizing hosting arrangement implementation costs and recognizing and presenting the expense and payments related to capitalized implementation costs for hosting arrangements in our financial statements. The provisions of ASU 2018-15 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and the provisions are to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are in the process of evaluating the impact of adoption on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU provides new guidance about the income statement classification of and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (“OCI”) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. We early adopted this guidance on May 25, 2018 upon entering into an interest rate swap agreement. The adoption of this standard did not impact our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business, which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance became effective on January 1, 2018 for interim and annual periods. The adoption of this standard did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 simplifies various aspects of the accounting for share-based payment transactions, including income tax consequences, presentation of awards as either equity or liabilities, presentation in the statement of cash flows and accounting for forfeitures. The provisions of ASU 2016-09 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2016. As allowed under the new guidance, we have elected to change our accounting policy to now recognize forfeitures as they occur. As of January 1, 2017, the date we adopted this ASU, the $0.5 million cumulative effect of that change in accounting policy resulted in a decrease to retained earnings and increase to additional paid-in capital. Additionally, ASU 2016-09 eliminates the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions in additional paid-in capital. In accordance with the new standard and prospectively since the date we adopted this ASU, we are recording excess tax benefits and tax deficiencies as an income tax benefit or provision in the consolidated statements of operations. The guidance also requires excess tax benefits to be reported as operating activities in the statement of cash flows rather than as a financing activity. We have elected to retrospectively adjust the cash flow classification, resulting in an increase of $0.7 million in cash from operating activities for the year ended December 31, 2016 with a corresponding decrease to cash from financing activities during this period.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with further clarification and improvements issued in ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) Targeted Improvements, which are collectively referred to as Topic 842. The new lease guidance in Topic 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Topic 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease effectively finances a purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (finance lease) or on a straight line basis over the term of the lease (operating lease). A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new lease guidance supersedes the existing guidance on accounting for leases in Leases (Topic 840). The provisions of Topic 842 are effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted.
We will adopt the new lease guidance on January 1, 2019 using the modified retrospective approach. As a result of adopting Topic 842, we will implement new processes and accounting policies. We are currently finalizing our accounting policies and determining changes needed in current processes for lease accounting and verifying the completeness of our lease population.
We are in the process of evaluating our current lease portfolio. The impact of adoption will depend on our lease portfolio as of the adoption date and our accounting policy elections. For our operating leases, we expect to recognize approximately $7 million of operating lease right of use assets and approximately $7 million of operating lease liabilities in the consolidated balance sheet upon adoption.
On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, using the full retrospective method. The adoption of ASC Topic 606 impacted the timing of recognition of revenue from unprocessed metal sales to toll customers. The following tables summarize the effects of adopting ASC Topic 606 on our prior period unaudited Consolidated Financial Statements:
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef