| Significant Accounting Policies | NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”). The accompanying consolidated
financial statements include all of our wholly owned subsidiaries
and majority owned subsidiaries. The non-controlling interest
relating to a majority owned subsidiary is not significant for
presentation. All intercompany accounts and transactions have been
eliminated.
Use of Estimates
Preparation of the consolidated financial statements in conformity
with U.S. GAAP requires management 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 and the reported amounts of
revenues and expenses during the reporting period. Significant
estimates include the allowance for doubtful accounts, valuation
allowance on deferred tax assets, valuation of the reporting unit,
intangible assets and other long-lived assets, share based
compensation, reserves for general liability, and workers’
compensation and medical insurance. Management believes the
accounting estimates are appropriate and reasonably determined;
however, due to the inherent uncertainties in making these
estimates, actual amounts could differ from such estimates.
Cash and Cash Equivalents
We consider all highly-liquid investments purchased with original
term to maturity of three months or less to be cash equivalents.
All such items referenced herein are classified as cash and we have
no items classified as cash equivalents as of the years ended
December 31, 2015 or 2014. Substantially all cash is held in
two banks at December 31, 2015. The banks provide FDIC
coverage of $0.25 million per depositor.
Revenue Recognition
Revenue from the sale and installation of products is recognized
when all of the following have occurred: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred
or services have been rendered; (iii) the price is fixed or
determinable; and (iv) the ability to collect is reasonably
assured. Revenue from the sale and installation of products is
recognized net of adjustments and discounts and at the time the
installation is complete.
Business Combinations
The purchase price for business combinations is allocated to the
estimated fair values of acquired tangible and intangible assets,
including goodwill, and assumed liabilities, where applicable.
Additionally, we recognize customer relationships, trademarks and
trade names, and non-competition agreements as identifiable
intangible assets. These assets are recorded at fair value as of
the transaction date. The fair value of these intangibles is
determined primarily using the income approach and using current
industry information which involves significant unobservable inputs
(Level 3 inputs). These inputs include projected sales, margin, and
tax rate.
At times, the total purchase price for a business combination could
be less than the estimated fair values of acquired tangible and
intangible assets. In these cases, we record a gain on bargain
purchase within Other Expenses in the Consolidated Statements of
Operations rather than goodwill in accordance with generally
accepted accounting principles.
Accounts Receivable
We account for trade receivables based on amounts billed to
customers. Past due receivables are determined based on contractual
terms. We do not accrue interest on any of our trade
receivables.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the failure of customers to make required payments.
The allowance is determined by management based on our historical
losses, specific customer circumstances, and general economic
conditions. We analyze aged accounts receivable and generally
increase the allowance as receivables age. Management reviews
accounts receivable and records an allowance for specific customers
based on current circumstances and charges off the receivable
against the allowance when all attempts to collect the receivable
have failed. This analysis is performed regularly and the allowance
is adjusted accordingly. The following sets forth our allowance for
doubtful accounts (in thousands):
Allowance for doubtful accounts receivable
January 1, 2013 $ 1,412
Charged to costs and expenses 1,038
Charged to other accounts (1) 479
Deductions (2) (1,191 )
December 31, 2013 $ 1,738
Charged to costs and expenses 1,900
Charged to other accounts (1) 292
Deductions (2) (1,269 )
December 31, 2014 $ 2,661
Charged to costs and expenses 919
Charged to other accounts (1) 533
Deductions (2) (1,627 )
December 31, 2015 $ 2,486
(1) Recovery of receivables previously
written off as bad debt and other
(2) Write-off of uncollectible accounts
receivable
Concentration of Credit Risk
Credit risk is our risk of financial loss from the non-performance
of a contractual obligation on the part of our counterparty. Such
risk arises principally from our receivables from customers and
cash and bank balances. Substantially all of our trade accounts
receivable are from entities engaged in residential and commercial
construction. We perform periodic credit evaluations of our
customers’ financial condition. The general credit risk of
our counterparties is not considered to be significant. In
addition, no individual customer made up more than 3% of accounts
receivable or 4% of net revenue for the years ended
December 31, 2015, 2014 and 2013.
Inventories
Inventories consist of insulation, garage doors, rain gutters,
shower doors, mirrors, closet shelving and other products. We
install these products but do not manufacture them. We value
inventory at the lower of cost or market with cost determined using
the first-in, first-out (“FIFO”) method. As of
December 31, 2015 and 2014, all inventory was finished
goods.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. We provide for depreciation and amortization of
property and equipment using the straight-line method, over the
expected useful lives of the assets. Expected useful lives of
property and equipment vary but generally are the shorter of lease
life or five years for vehicles and leasehold improvements, three
to five years for furniture, fixtures and equipment and 30 years
for buildings.
Major renewals and improvements are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred. When assets
are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is recorded.
Goodwill
Goodwill results from business combinations and represents the
excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible assets.
Annually, on October 1, or if conditions indicate an earlier
review is necessary, we assess qualitative factors to determine if
it is more likely than not that the fair value of a reporting unit
is less than its carrying amount and if it is necessary to perform
the quantitative two-step goodwill impairment test. If we perform
the quantitative test, we compare the carrying value of the
reporting unit to an estimate of the reporting unit’s fair
value to identify potential impairment. The estimate of the
reporting unit’s fair value is determined by weighting a
discounted cash flow model and a market- related model using
current industry information that involve significant unobservable
inputs (Level 3 inputs). In determining the estimated future cash
flow, we consider and apply certain estimates and judgments,
including current and projected future levels of income based on
management’s plans, business trends, prospects and market and
economic conditions and market-participant considerations. If the
estimated fair value of the reporting unit is less than the
carrying value, a second step is performed to determine the amount
of the potential goodwill impairment. If impaired, goodwill is
written down to its estimated implied fair value.
Impairment of Other Intangible and Long-Lived Assets
Other intangible assets consist of customer relationships,
non-competition agreements and business trademarks and trade names.
Amortization of finite lived intangible assets is recorded to
reflect the pattern of economic benefits based on projected
revenues over their respective estimated useful lives (customer
relationships—eight to 15 years, non-competition
agreements—two to five years and business trademarks and
trade names—eight to 15 years). We do not have any
indefinite-lived intangible assets other than goodwill.
We review long-lived assets whenever events or changes in
circumstances indicate that the carrying value of an asset may not
be recoverable. An impairment loss is recognized when estimated
future cash flows expected to result from the use of an asset and
its eventual disposition are less than its carrying amount. When
impairment is identified, the carrying amount of the asset is
reduced to its estimated fair value. Assets to be disposed of are
recorded at the lower of net book value or fair market value less
cost to sell at the date management commits to a plan of disposal.
There was no impairment loss for the years ended December 31,
2015, 2014 and 2013.
Other Liabilities
Our workers’ compensation insurance is primarily under a
high-deductible insurance policy and our general liability
insurance is under a self-insured retention program
(“SIR”). We are insured for covered claims above the
deductible and SIR. The liabilities represent our best estimate of
our costs, using generally accepted actuarial reserving methods, of
the ultimate obligations for reported claims plus those incurred
but not reported for all claims incurred through December 31,
2015 and 2014. We establish case reserves for reported claims using
case-basis evaluation of the underlying claims data and we update
as information becomes known. We regularly monitor the potential
for changes in estimates, evaluate our insurance accruals and
adjust our recorded provisions.
The assumptions underlying the ultimate costs of existing claim
losses are subject to a high degree of unpredictability, which can
affect the liability recorded for such claims. For example,
variability in inflation rates of health care costs inherent in
workers’ compensation claims can affect the ultimate costs.
Similarly, changes in legal trends and interpretations, as well as
a change in the nature and method of how claims are settled can
affect ultimate costs. Our estimates of liabilities incurred do not
anticipate significant changes in historical trends for these
variables, and any changes could have a considerable effect on
future claim costs and currently recorded liabilities.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $2.3 million, $1.6 million and $1.6 million for the
years ended December 31, 2015, 2014 and 2013, respectively,
and is included in selling expense on the Consolidated Statements
of Operations.
Other Operating Expenses
We recorded $1.4 million of settlement expenses in 2013 related to
two lawsuits against us, of which approximately $0.9 million was
included in Other operating expenses and $0.5 million was included
in Administrative operating expenses during the year ended
December 31, 2013. All expenses were paid by December 31,
2014.
Deferred Financing Costs
Deferred financing costs totaling $1.1 million and $0.6 million,
net are amortized over the term of the related debt on a
straight-line basis which approximates the effective interest
method and are included in other non-current assets on the
Consolidated Balance Sheets as of December 31, 2015 and 2014,
respectively. The related amortization expense of these costs was
$0.3 million, $0.2 million and $0.2 million and is included in
interest expense on the Consolidated Statements of Operations for
the years ended December 31, 2015, 2014 and 2013,
respectively. We also wrote off the remaining loan costs associated
with our old credit agreement upon entering into our previous
credit agreement. These costs of $0.2 million are included in
interest expense on the Consolidated Statements of Operations for
the year ended December 31, 2014. See Note 5, Long-Term Debt,
for more information on our credit agreement.
Share-Based Compensation
Our share-based compensation program is designed to attract and
retain employees while also aligning employees’ interests
with the interests of our stockholders. Restricted stock awards are
periodically granted to certain employees, officers, and
non-employee members of our Board of Directors under the
stockholder-approved 2014 Omnibus Incentive Plan. The awards are
deemed to be equity-based with a service condition and do not
contain a market condition. Fair value of the awards to employees
and officers is measured at the grant date and amortized to expense
over the vesting period of the awards using the straight-line
attribution method for all service-based awards with a graded
vesting feature. This fair value is reduced by assumed forfeitures
and adjusted for actual forfeitures until vesting. Employees and
officers are subject to tax at the vesting date based on the market
price of the shares on that date, or on the grant date if an
election is made. The future income tax benefit associated with
these awards is recorded over the vesting period. In the event
dividends are ultimately declared and paid, a forfeiture rate for
the unvested restricted shares would be applied.
Insurance Liabilities
We carry insurance for a number of risks, including, but not
limited to, workers’ compensation, general liability, vehicle
liability, property and our obligation for employee-related health
care benefits. Liabilities relating to claims associated with these
risks are estimated by considering historical claims experience,
including frequency, severity, demographic factors, and other
actuarial assumptions. In estimating our liability for such claims,
we periodically analyze our historical trends, including loss
development, and apply appropriate loss development factors to the
incurred costs associated with the claims with the assistance of
external actuarial consultants. While we do not expect the amounts
ultimately paid to differ significantly from our estimates, our
reserves and corresponding expenses could be affected if future
claim experience differs significantly from historical trends and
actuarial assumptions.
Income Taxes
We account for income taxes using the asset and liability method.
Under this method, the amount of taxes currently payable or
refundable are accrued and deferred tax assets and liabilities are
recognized for the estimated future tax consequences of temporary
differences that currently exist between the tax basis and
financial reporting basis of our assets and liabilities.
Valuation allowances are established against deferred tax assets
when it is more likely than not that the realization of those
deferred tax assets will not occur. In evaluating our ability to
recover our deferred tax assets within the jurisdiction from which
they arise, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax
liabilities, the ability to produce future taxable income, prudent
and feasible tax planning strategies and recent financial
operations. In projecting future taxable income, we begin with
historical results adjusted for the results of discontinued
operations and changes in accounting policies and incorporate
assumptions including the amount of future federal and state pretax
operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment about the forecasts
of future taxable income and are consistent with the plans and
estimates we use to manage the underlying businesses.
Deferred tax assets and liabilities are measured using the enacted
tax rates in effect in the years when those temporary differences
are expected to reverse. The effect on deferred taxes from a change
in tax rate is recognized through continuing operations in the
period that includes the enactment date of the change. Changes in
tax laws and rates could also affect recorded deferred tax assets
and liabilities in the future. Management is not aware of any such
changes that would have a material effect on our results of
operations, cash flows, or financial position.
A tax benefit from an uncertain tax position may be recognized when
it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. Income tax
positions must meet a more likely than not recognition threshold to
be recognized.
We recognize tax liabilities for uncertain tax positions and adjust
these liabilities when our judgment changes as a result of the
evaluation of new information not previously available. Liabilities
related to uncertain tax positions are recorded in other current
liabilities and other long-term liabilities on the Consolidated
Balance Sheets. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that
is materially different from the current estimate of the tax
liabilities. These differences will be reflected as increases or
decreases to income tax expense and the effective tax rate in the
period in which the new information becomes available. Interest and
penalties related to unrecognized tax benefits are recognized
within income tax expense in the Consolidated Statements of
Operations. Accrued interest and penalties are recognized in
accrued expenses on the Consolidated Balance Sheets.
Our income tax expense, deferred tax assets and liabilities and
reserves for unrecognized tax benefits reflect management’s
best assessment of estimated future taxes to be paid. We are
subject to income taxes in the United States which includes
numerous state and local jurisdictions. Significant judgments and
estimates are required in determining the income tax expense,
deferred tax assets and liabilities and the reserve for
unrecognized tax benefits.
Discontinued Operations
We continually review each of our markets in order to refine our
overall investment strategy and optimize capital and resource
allocations in an effort to enhance our financial position and
increase our value. If a component of the Company or a group of
components of the Company are disposed, we will report the
activities of the component or group of components in discontinued
operations if the disposal represents a strategic shift that has
(or will have) a major effect on our operations and financial
results. Customers of discontinued locations will not be served by
other locations. There were no material assets or liabilities
related to our discontinued operations as of December 31, 2015
or 2014. Discontinued operations were not segregated in the
Consolidated Statements of Cash Flows.
This policy was implemented upon the adoption of ASU 2014-08,
“Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an
Entity” on January 1, 2015. Prior to the adoption of the
new standard, we performed a review of both external market factors
and our position in each market. We did not discontinue any
operations during the year ended December 31, 2014 and all
expenses incurred during that period relate to operations
discontinued in prior periods. During the year ended
December 31, 2013, we elected to discontinue operations in
certain underperforming markets.
Estimated Fair Value of Financial Instruments
Accounts receivable, accounts payable, and accrued liabilities as
of December 31, 2015 and 2014 approximate their fair value due
to the short-term maturities of these financial instruments. The
carrying amounts of the long-term debt, including the term loan,
delayed draw term loan and revolving credit facility, under the
Prior Credit Agreement and the Term Loan, Delayed Draw Term Loan
Facility and Revolving LOC under the new Credit and Security
Agreement, approximate their fair values as of December 31,
2015 and 2014 due to the short term maturities of the underlying
variable rate LIBOR agreements. The carrying amount of the
obligations associated with our capital leases approximate fair
value as of December 31, 2015 and 2014 because the associated
assets generate sufficient cash to settle the obligations. All debt
classifications represent value measurements.
Recently Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-08, “Presentation of Financial
Statements (Topic 205) and Property, Plant, and Equipment (Topic
360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity.” The amendments in this
update change the requirements for reporting discontinued
operations in Subtopic 205-20. A discontinued operation may include
a component of an entity or a group of components of an entity, or
a business or nonprofit activity. A disposal of a component of an
entity or a group of components of an entity is required to be
reported in discontinued operations if the disposal represents a
strategic shift that has (or will have) a major effect on an
entity’s operations and financial results. We adopted this
ASU effective January 1, 2015 and have concluded that it has
not had a material impact on our consolidated financial
statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes
(Topic 740), Balance Sheet Classification of Deferred
Assets.” This ASU is intended to simplify the presentation of
deferred taxes on the balance sheet and will require an entity to
present all deferred tax assets and deferred tax liabilities as
non-current on the balance sheet. Under the current guidance,
entities are required to separately present deferred taxes as
current or non-current. Netting deferred tax assets and deferred
tax liabilities by tax jurisdiction will still be required under
the new guidance. The new accounting guidance is effective for
annual periods beginning after December 15, 2016 with early
adoption permitted. We adopted ASU 2015-17 as of December 31,
2015 and applied the new guidance prospectively. Our deferred tax
balances as of December 31, 2014 have not been revised. We
have concluded this new ASU has not had and will not have a
material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet
Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606).” ASU 2014-09 sets forth
a new revenue recognition model that requires identifying the
contract(s) with a customer, identifying the performance
obligations in the contract, determining the transaction price,
allocating the transaction price to the performance obligations and
recognizing the revenue upon satisfaction of performance
obligations. In July 2015, the FASB voted to defer the application
of the provisions of this standard for public companies until
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. We are
still evaluating whether this ASU will have a material impact on
our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
“Interest—Imputation of Interest.” The amendments
in this update require that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. For public business entities, the
amendments in this update are effective for financial statements
issued for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. We are still evaluating
whether this ASU will have a material impact on our consolidated
financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic
330).” The amendments in this update require an entity to
measure inventory within the scope of this update at the lower of
cost and net realizable value. For public business entities, the
amendments in this update are effective for financial statements
issued for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years. We are still evaluating
whether this ASU will have a material impact on our consolidated
financial statements.
In August 2015, the FASB issued ASU 2015-15, “Imputation of
Interest (Subtopic 835-30).” This ASU amends ASU 2015-03
regarding the presentation and subsequent measurement of debt
issuance costs related to line of credit arrangements.
Specifically, it provides guidance for deferring and presenting
debt issuance costs as an asset and subsequently amortizing the
deferred debt issuance costs ratably over the term of the line of
credit arrangement, regardless of whether there are any outstanding
borrowings on the line of credit arrangement. For public business
entities, the amendments in this update are effective for financial
statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal
years. We are still evaluating whether this ASU will have a
material impact on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business
Combinations (Topic 805).” This ASU requires an acquirer to
retrospectively adjust provisional amounts recognized in a business
combination during the measurement period. To simplify the
accounting for adjustments made to provisional amounts, the
amendments in this update require that the acquirer recognize
adjustments to provisional amounts that are identified during the
measurement-period in the reporting period in which the adjustment
amount is determined. The acquirer is required to also record, in
the same period’s financial statements, the effect on
earnings of changes in depreciation, amortization or other income
effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the
acquisition date. In addition, an entity is required to present
separately on the face of the income statement or disclose in the
notes to the financial statements the portion of the amount
recorded in current period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to
the provisional amounts had been recognized as of the acquisition
date. For public business entities, the amendments in this update
are effective for fiscal years beginning after December 15,
2015, including interim periods within those fiscal years. We are
still evaluating whether this ASU will have a material impact on
our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842).” The amendments in this update amend the existing
accounting standards for lease accounting, including requiring
lessees to recognize most leases on their balance sheets and making
targeted changes to lessor accounting. For public business
entities, the amendments in this update are effective for annual
reporting periods beginning after December 15, 2018, including
interim periods within those fiscal years, and early adoption is
permitted as of the standard’s issuance date. ASU 2016-02
requires a modified retrospective transition approach for all
leases existing at, or entered into after, the date of initial
application, with an option to use certain transition relief. We
are still evaluating whether this ASU will have a material impact
on our consolidated financial statements. |
