| Summary of Significant Accounting Policies | 2.
Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with GAAP and reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to fairly present the Consolidated Balance Sheet as of December 31, 2018 and 2017, and the Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Equity and Cash Flows for the years ended December 31, 2018, 2017 and 2016. The accompanying consolidated financial statements comprise Covia Holdings Corporation and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. On June 1, 2018, Unimin effected an 89:1 stock split with respect to its shares of common stock (see Note 6). Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the stock split. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to: business combination purchase price allocation, and the useful life of definite-lived intangible assets; asset retirement obligations; estimates of allowance for doubtful accounts; estimates of fair value for reporting units and asset impairments (including impairments of goodwill and other long-lived assets); adjustments of inventories to net realizable value; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred tax assets; and reserves for contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the use of valuation experts. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. Reclassifications Certain reclassifications of prior period presentations have been made to conform to the current period presentation. Revenue Recognition We derive our revenues by mining, manufacturing, and processing minerals that our customers purchase for various uses. Revenues are primarily derived from contracts with customers with terms typically ranging from one to eight years in length, and are measured by the amount of consideration we expect to receive in exchange for transferring our products. The consideration we expect to receive is based on the volumes and price of the product per ton as defined in the underlying contract. The price per ton is based on the market value for similar products plus costs associated with transportation and transloading, as applicable. Depending on the contract, this may also be net of discounts and rebates. The transaction price is not adjusted for the effects of a significant financing component, as the time period between transfer of control of the goods and expected payment is one year or less. Sales, value-added, and other similar taxes collected are excluded from revenue. On January 1, 2018, we adopted ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606) Our products may be sold with rebates, discounts, take-or-pay provisions, or other features which are accounted for as variable consideration. Rebates and discounts are not material and have not been separately disclosed. Contracts that contain take-or-pay provisions obligate customers to pay shortfall payments if the required volumes, as defined in the contracts, are not purchased. Shortfall payments are recognized as revenues when the likelihood of the customer purchasing the minimum volume becomes remote, subject to renegotiation of the contract and collectability. At December 31, 2018 and 2017, we had no revenues or accounts receivable related to shortfall payments. We disaggregate revenues by major source consistent with our segment reporting. See Note 21 for further detail Cash and Cash Equivalents Cash and cash equivalents are comprised of cash as well as liquid investments with original maturities of three months or less. Our cash and cash equivalents are held on deposit and are available to us on demand without restriction, prior notice, or penalty. At December 31, 2018, we had time deposits totaling $60,000 held with two U.S. banking institutions Accounts Receivable Accounts receivable as presented in the consolidated balance sheets are related to our contracts and are recorded when the right to consideration becomes likely at the amount management expects to collect. Accounts receivable do not bear interest if paid when contractually due, and payments are generally due within thirty to forty-five days of invoicing. We typically do not record contract assets, as the transfer of control of our products results in an unconditional right to receive consideration. Allowance for Doubtful Accounts The collectability of all outstanding receivables is reviewed and evaluated by management. This review includes consideration for the risk profile of the receivables, customer credit quality and certain indicators such as the aging of past-due amounts and general economic conditions. If it is determined that a receivable balance will not likely be recovered, an allowance for such outstanding receivable balance is established. Inventories The cost of inventories is based on the weighted average principle, and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing inventories to their existing location and condition. In the case of finished goods and work-in-process, cost includes an appropriate share of production overhead. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling costs. Inventories are written down to net realizable value when the cost of the inventories exceeds that value. Consumables and regularly-replaced spare parts are stated at cost, less any provision for obsolescence. Property, Plant, and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation, depletion and impairment losses (if any). Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, the present value of the costs of dismantling and removing the items and restoring the site on which they are located. Where components of a large item have different useful lives, they are accounted for as separate items of property, plant and equipment. Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within Other operating expense, net in the Consolidated Statements of Income (Loss). Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the related assets from the date that they are installed and are ready for use, or with respect to internally constructed assets, from the date that the asset is completed and ready for use. The estimated service lives of property, plant and equipment are principally as follows:
Land and improvements
15-40 years
Mineral rights properties
10-20 years
Machinery and equipment
2-30 years
Buildings and improvements
10-40 years
Railroad equipment
10-25 years
Furniture, fixtures, and other
3-10 years
Mine exploration and mine development costs include expenditures to determine the existence and quality of a mineral body, drilling, gaining access to and preparing locations for drilling, clearing ground, drainage and building ramps and access ways. Mine exploration and mine development costs are expensed if data shows no probable and proven reserves. We begin capitalizing mine exploration and mine development costs at the point when proven and probable reserves are established and cease capitalization of these costs when the production of the mine commences. Mine exploration and mine development costs are amortized over the shorter of 10 years or the life of the mine using the units-of-production method. Stripping costs are costs of removing overburden and waste materials to gain access to mineral reserves. Prior to the production phase of the mine, stripping costs are capitalized. The production phase of a mine is deemed to begin when saleable materials, beyond a de minimum amount, are produced. Stripping costs incurred during the production phase are variable production costs included in the costs of inventory, to be recognized in cost of sales in the same period as the sale of inventory. The determination of the production phase becomes complex when second and subsequent pits at multiple pit-mines are developed. The stripping costs of second and subsequent pits are expensed if they are determined to be part of the integrated operations of the first pit which is in the production phase. The stripping costs of second and subsequent pits in a mine are capitalized if the pits are not integrated operations and are separate and distinct areas within the mine. Capitalized stripping costs are amortized on a units of production method. Assets under construction are stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and put into use. We capitalize interest costs incurred on funds used to construct property, plant, and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest cost capitalized was $8,640 Depreciation and depletion expense was $171,750, $98,802, and $102,515 in the years ended December 31, 2018, 2017, and 2016, respectively. Deferred Financing Costs Deferred financing costs are amortized over the terms of the related debt obligations. Deferred financing costs associated with terms loans are included in long-term debt and deferred financing costs associated with the revolving credit facility are included in other assets. At December 31, 2017, we did not have deferred financing costs. The following table presents deferred financing costs as of December 31, 2018:
December 31, 2018
Deferred financing costs
$
40,151
Accumulated amortization
(3,489
)
Deferred financing costs, net
$
36,662
Goodwill Goodwill is tested annually for impairment at the reporting unit level, and is tested for impairment more frequently if events and circumstances indicate that the reporting unit might be impaired. In testing goodwill for impairment, we perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, we evaluate qualitative factors such as economic performance, industry conditions, and other factors. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value. The evaluation of goodwill for possible impairment includes estimating fair value using one or a combination of valuation techniques, such as discounted cash flows or comparable companies’ earnings multiples or transactions. These valuations require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Although we believe our assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result. Refer to Note 10 for additional information. Impairment of Long-Lived Assets and Definite-Lived Intangible Assets We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets, including property, plant and equipment, mineral reserves or mineral rights and definite-lived intangible assets may not be recoverable. If such circumstances are determined to exist, an estimate of future cash flows produced by the asset group or individual assets within the asset group is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. A detailed determination of the fair value may be carried forward from one year to the next if certain criteria have been met. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Factors we generally consider important in our evaluation and that could trigger an impairment review of the carrying value of the asset group or individual assets within the asset group include expected operating trends, significant changes in the way assets are used, underutilization of our tangible assets, discontinuance of certain products by us or by our customers, and significant negative industry or economic trends. The recoverability of the carrying value of our development stage mineral properties is dependent upon the successful development, start-up and commercial production of our mineral deposits and related processing facilities. Our evaluation of mineral properties for potential impairment primarily includes assessing the existence or availability of required permits and evaluating changes in our mineral reserves, or the underlying estimates and assumptions, including estimated production costs. Assessing the economic feasibility requires certain estimates, including the prices of products to be produced and processing recovery rates, as well as operating and capital costs. The evaluation of such assets for possible impairment includes a qualitative assessment of macroeconomic conditions, industry and market environments, overall performance of the reporting segment and specific events. If the qualitative assessment indicates the asset may be impaired, then a quantitative assessment is performed which requires estimating fair value using one or a combination of valuation techniques, such as discounted cash flows or based on comparable companies or transactions. These valuations require us to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Deviations from these assumptions and estimates could produce a materially different result. Earnings per Share Basic and diluted earnings per share is presented for net income (loss) attributable to us. Basic earnings per share is computed by dividing income (loss) available to our common stockholders by the weighted-average number of outstanding common shares for the period. Diluted earnings per share is computed by increasing the weighted-average number of outstanding shares of common stock to include the additional shares of common stock that would be outstanding after exercise of outstanding stock options and restricted stock units calculated using the treasury stock method. Potential shares of common stock in the diluted earnings per share calculation are excluded to the extent that they would be anti-dilutive. Prior to the Merger, we had no stock options, warrants, convertible securities, or other potentially dilutive financial instruments and, therefore, there is no difference in the number basic weighted average shares outstanding and diluted weighted average shares outstanding. Derivatives and Hedging Activities Due to our variable-rate indebtedness, we are exposed to fluctuations in interest rates. We enter into interest rate swap agreements as a means to partially hedge our variable interest rate risk. The derivative instruments are reported at fair value in other non-current assets and other long-term liabilities. Changes in the fair value of derivatives are recorded each period in accumulated other comprehensive loss. For derivatives not designated as hedges, the gain or loss is recognized in current earnings. No components of our hedging instruments were excluded from the assessment of hedge effectiveness. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. The gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. See Note 13 for further information. Foreign Currency Translation The financial statements of subsidiaries with a functional currency other than the reporting currency are translated into U.S. dollars using month-end exchange rates for assets and liabilities and average monthly exchange rates for income and expenses. Any translation adjustments are recorded in accumulated other comprehensive loss within stockholders’ equity. Foreign currency exchange gains or losses that arise from currency exchange rate changes on transactions denominated in currencies other than the functional currency are recorded in the Consolidated Statements of Income (Loss), as applicable. Concentration of Labor Approximately 34% of our labor force is covered under union agreements in the U.S., Canada and Mexico. These agreements are renegotiated when their terms expire. There are three agreements that are due to be renegotiated in 2019 for the U.S. and Canada, which represents approximately 16% of the U.S. and Canada agreements. There are nine agreements in Mexico that are renegotiated annually. Concentration of Credit Risk At December 31, 2018, we had two customers whose accounts receivable balances exceeded 10% of total receivables. These two customers each comprised approximately 10% of our accounts receivable balance at December 31, 2018. At December 31, 2017, we had one customer whose accounts receivable balance approximated 13% of our accounts receivable balance. Income Taxes Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. This approach requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based upon the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the expenses are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. We evaluate quarterly the realizability of our deferred tax assets by assessing the need for a valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income in the appropriate jurisdiction to utilize the asset, and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets. Factors that may affect our ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: a decline in sales or margins, increased competition or loss of market share. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended time to resolve. We believe that adequate provisions for income taxes have been made for all years. Typically, the largest permanent item in computing both our effective rate and taxable income is the deduction for statutory depletion. The depletion deduction is dependent upon a mine-by-mine computation of both gross income from mining and taxable income. The Tax Act subjects us to current tax on our GILTI. To the extent that tax expense is incurred under the GILTI provisions, it will be treated as a component of income tax expense in the period incurred. Asset Retirement Obligation We estimate the future cost of dismantling, restoring, and reclaiming operating excavation sites and related facilities in accordance with federal, state, and local regulatory requirements. We record the initial estimated present value of these costs as an asset retirement obligation and increase the carrying amount of the related asset by a corresponding amount. The related asset is classified as property, plant, and equipment and amortized over its useful life. We adjust the related asset and liability for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate. Cost estimates are escalated for inflation and market risk premium, then discounted at the credit adjusted risk free rate. If the asset retirement obligation is settled for more or less than the carrying amount of the liability, a loss or gain will be recognized in the period the obligation is settled. As of December 31, 2018 and 2017, we had asset retirement obligations of $31,199 and $12,472, respectively. We recognized accretion expense of $2,543, $1,369, and $915 in the years ended December 31, 2018, 2017, and 2016, respectively. These amounts are included in Other operating expense, net in the Consolidated Statements of Income (Loss). Other than those asset retirement obligations that were assumed and recorded in connection with the Merger and accretion expense, there were no changes in the liability during these periods. Research and Development (“R&D”) Our R&D expenses consist of personnel and other direct and indirect costs for internally-funded project development. Total expenses for R&D for the year ended December 31, 2018 were $2,210 Accumulated Other Comprehensive Loss Accumulated other comprehensive loss is a separate line within the Consolidated Statements of Equity that reports the Company’s cumulative income (loss) that has not been reported as part of net income (loss). Items that are included in this line are the income (loss) from foreign currency translation, actuarial gains (losses) and prior service cost related to pension and other post-employment liabilities and unrealized gains on interest rate hedges. The components of accumulated other comprehensive loss attributable to Covia Holdings Corporation at December 31, 2018 and 2017 were as follows:
December 31, 2018
Gross
Tax Effect
Net Amount
Foreign currency translation adjustments
$
(53,389
)
$
-
$
(53,389
)
Amounts related to employee benefit obligations
(52,496
)
14,574
(37,922
)
Unrealized gain (loss) on interest rate hedges
(5,083
)
1,169
(3,914
)
$
(110,968
)
$
15,743
$
(95,225
)
December 31, 2017
Gross
Tax Effect
Net Amount
Foreign currency translation adjustments
$
(54,571
)
$
-
$
(54,571
)
Amounts related to employee benefit obligations
(100,817
)
27,160
(73,657
)
$
(155,388
)
$
27,160
$
(128,228
) The following table presents the changes in accumulated other comprehensive loss by component for the year ended December 31, 2018:
Year Ended December 31, 2018
Foreign
Amounts related
Unrealized
currency
to employee
gain (loss)
translation
benefit
on interest
adjustments
obligations
rate hedges
Total
Beginning balance
$
(54,571
)
$
(73,657
)
$
-
$
(128,228
)
Other comprehensive income
before reclassifications
1,182
31,829
(4,714
)
28,297
Amounts reclassified from
accumulated other comprehensive loss
-
3,906
800
4,706
Ending balance
$
(53,389
)
$
(37,922
)
$
(3,914
)
$
(95,225
)
Year Ended December 31, 2017
Foreign
Amounts related
currency
to employee
translation
benefit
adjustments
obligations
Total
Beginning balance
$
(57,177
)
$
(61,322
)
$
(118,499
)
Other comprehensive income
before reclassifications
2,606
(7,823
)
(5,217
)
Amounts reclassified from accumulated
other comprehensive loss
-
(4,512
)
(4,512
)
Ending balance
$
(54,571
)
$
(73,657
)
$
(128,228
) In connection with the adoption of ASU 2018-02, we have included $10,455 in amounts reclassified from accumulated other comprehensive loss for the reclassification of stranded tax effects resulting from the Tax Act. This amount has been reclassified from accumulated other comprehensive loss to retained earnings within Shareholders’ Equity. The following table presents the reclassifications out of accumulated other comprehensive loss during the years ended December 31, 2018, 2017, and 2016:
Amount
from accumulated
Year Ended December 31, 2018
other comprehensive
Affected line item on
Details about accumulated other comprehensive loss
loss
the statement of income (loss)
Change in fair value of derivative swap agreements
Interest rate hedging contracts
$
1,040
Interest expense, net
Tax effect
(240
)
Provision for income taxes
$
800
Net of tax
Amortization of employee benefit obligations
Prior service costs
$
1,675
Other non-operating expense, net
Actuarial losses
3,606
Other non-operating expense, net
Tax effect
(1,375
)
Provision for income taxes
3,906
Net of tax
Total reclassifications for the period
$
4,706
Net of tax
Amount
from accumulated
Year Ended December 31, 2017
other comprehensive
Affected line item on
Details about accumulated other comprehensive loss
loss
the statement of income (loss)
Amortization of employee benefit obligations
Prior service cost
$
552
Other non-operating expense, net
Actuarial losses
5,745
Other non-operating expense, net
Tax effect
(354
)
Provision for income taxes
Total reclassifications for the period
$
5,943
Net of tax
Amount
from accumulated
Year Ended December 31, 2016
other comprehensive
Affected line item on
Details about accumulated other comprehensive loss
loss
the statement of income (loss)
Amortization of employee benefit obligations
Prior service cost
$
541
Other non-operating expense, net
Actuarial losses
18,577
Other non-operating expense, net
Tax effect
(7,347
)
Provision for income taxes
Total reclassifications for the period
$
11,771
Net of tax |
