| 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, 2019 and 2018, and the Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Equity and Cash Flows for the years ended December 31, 2019, 2018 and 2017. The accompanying consolidated financial statements comprise Covia Holdings Corporation and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. On June 1, 2018, following the Merger, we effected an 89:1 stock split with respect to our shares of common stock (the “Stock Split”). See Note 7 to these Consolidated Financial Statements for additional information regarding the Stock Split. Unless otherwise noted, impacted amounts and share information included in the consolidated 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 consolidated 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, the useful life of definite-lived intangible assets; future cash flow estimates utilized in impairment calculations; units-of-production amortization calculations; 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; reserves for contingencies and litigation and the fair value of financial instruments, including derivative instruments. 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, including deferred revenue. Revenue Recognition We primarily 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. Revenues are recognized as each performance obligation within the contract is satisfied. This occurs with the transfer of control of our product in accordance with delivery methods as defined in the underlying contract. Performance obligations do not extend beyond one year. Transfer of control to customers generally occurs when products leave our facilities or at other predetermined control transfer points. We account for shipping and handling activities that occur after control of the related good transfers as a cost of fulfillment instead of a separate performance obligation. Transportation costs to move product from our production facilities to our distribution terminals are borne by us and capitalized into inventory. These costs are included in cost of goods sold as the products are sold. Our contracts may include one or multiple distinct performance obligations. Revenues are assigned to each performance obligation based on its relative standalone selling price, which is generally the contractually-stated price. 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. We enter into certain supply agreements with customers that include provisions requiring payment at the inception of the supply agreement. Deferred revenue is recorded when payment is received in advance of the performance obligation. See Note 13 for further detail. We disaggregate revenues consistent with our segment reporting. See Note 26 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, 2019 and 2018, we had time deposits totaling $150.0 million and $60.0 million, respectively. 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 subject to review and evaluation by management. This review includes consideration for the risk profile of the customers, customer credit quality and certain indicators such as the aging of past-due amounts and general industry and 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 weighted average cost, 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. Consumables and regularly-replaced spare parts are stated at cost, less any provision for obsolescence. 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. 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 and other costs directly attributable to bringing the assets to a working condition for their intended use. 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 within Other operating expense (income), 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. Where components of a large item have different useful lives, they are accounted for as separate items of property, plant and equipment. The estimated service lives of property, plant and equipment are principally as follows:
Land improvements
2-35 years
Machinery and equipment
2-35 years
Buildings and improvements
12-50 years
Railroad equipment
3-40 years
Furniture, fixtures, and other
2-15 years
Depletion and amortization of mineral rights properties are recorded as the minerals are extracted, based on units of production and estimates of minable reserves. 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 to mineral rights properties. The production phase of a mine is deemed to begin when saleable materials, beyond a de minimis 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 $8.1 million and $8.6 million in 2019 and 2018, respectively. . Deferred Financing Costs We defer costs directly associated with acquiring third-party financing, primarily debt origination costs and related professional expenses. Deferred financing costs (“DFC”) are amortized over the term of the related debt obligations. DFC associated with the Term Loan are reflected as a direct reduction of the long-term debt and DFC associated with the Revolver are included in other assets on the Consolidated Balance Sheets. In connection with the repurchases of portions of the Term Loan and cancellation of the Revolver in December 2019, we wrote off $4.7 million of DFC that were previously capitalized. Refer to Note 14 Long Term Debt for additional information. Amortization of DFC are included in interest expense. The following table presents DFC as of December 31, 2019 and 2018 :
December 31, 2019
December 31, 2018
(in thousands)
Deferred financing costs
$
33,788
$
40,151
Accumulated amortization
(8,034
)
(3,489
)
Deferred financing costs, net
$
25,754
$
36,662
Goodwill Goodwill is reviewed for impairment annually as of October 31, or more frequently if events and circumstances indicate that the reporting unit to which goodwill has been allocated might be impaired. In testing goodwill for impairment, we have the option to perform a qualitative assessment to determine whether the existence of events or circumstances indicate that it is more-likely-than-not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, we evaluate factors such as a sustained decrease in our share price, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, events affecting the reporting unit (e.g., the sale of all or a portion of the reporting unit), and other relevant entity-specific events. 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, or if we choose not to perform the qualitative assessment, 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, not to exceed the total amount of goodwill allocated to the reporting unit. The evaluation of goodwill for 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, future 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 11 for additional information. Impairment of Long-Lived Assets We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets may not be recoverable. If such circumstances exist, an estimate of undiscounted future net cash flows produced by the asset group is compared to the carrying value of the asset group. If the carrying value of the asset group is greater than the undiscounted cash flows, we recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset group. Factors we generally consider important in our evaluation and that could trigger a review of recoverability 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. Refer to Note 6 for further information. 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 of 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 to partially hedge our variable interest rate risk. The derivative instruments are reported at fair value in accrued expenses and other non-current 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 16 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. We record resulting translation adjustments 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 35% of our labor force is covered under union agreements in the U.S., Canada, and Mexico. These agreements are renegotiated when their terms expire between 2020 and 2024. Concentration of Credit Risk At December 31, 2019, we had no customers whose accounts receivable balances exceeded 10% of total receivables. At December 31, 2018, we had two customers whose accounts receivable balance exceeded 10% of total receivables. These two customers each comprised approximately 10% of our accounts receivable balance at December 31, 2018. 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, the reversal of taxable temporary differences, 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. Leases We lease railcars, machinery, equipment, land, buildings and office space under operating lease arrangements. Certain mobile equipment leasing arrangements, subject to purchase options, are leased under finance lease arrangements. We determine if an arrangement is or contains a lease at contract inception and exercise judgement and apply certain assumptions when determining the discount rate, lease term and lease payments. Generally, we do not have knowledge of the rate implicit in the lease and, therefore, in most cases we use the incremental borrowing rate for a lease. The incremental borrowing rate is determined based on lease term and the currency in which lease payments are made, adjusted for the impacts of collateral. The lease term includes the non-cancelable period of the lease plus any additional periods covered by an option to extend that we are reasonably certain to exercise, or an option to extend that is controlled by the lessor. Lease payments included in the measurement of the lease liability comprise fixed payments, and the exercise price of an option to purchase the underlying asset if we are reasonably certain to exercise the option. For lease arrangements that include lease and non-lease components, we elected to use the practical expedient to combine lease and non-lease components for all classes of leased assets and have elected to apply the short-term lease exemption to all classes of leased assets. The short-term lease exemption allows for the non-recognition of right-of-use assets and lease liabilities for leases with a term of twelve months or less. Certain of our lease agreements include rental payments based on a percentage of usage and others include rental payments adjusted periodically based on an index, such as the Consumer Price Index. These payments are recorded as variable costs under operating leases. All right-of-use assets are periodically reviewed for impairment losses and are included in our analysis of long-lived asset impairment. See Note 6 for further information. 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, as imposed by contract. We record the initial estimated present value of those costs as a liability in other non-current liabilities and increase the carrying amount of the related asset by a corresponding amount on the Consolidated Balance Sheets. The accretion of the liability is recorded as other operating expense (income), net and the related asset is classified as property, plant, and equipment and amortized over the estimated life of the mine or site. 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. Future 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. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss is a separate line within the Consolidated Statements of Equity that reports our cumulative income (loss) that has not been reported as part of net income (loss). The components of accumulated other comprehensive loss attributable to Covia Holdings Corporation at December 31, 2019 and 2018 were as follows:
December 31, 2019
Gross
Tax Effect
Net Amount
(in thousands)
Foreign currency translation adjustments
$
(47,584
)
$
-
$
(47,584
)
Amounts related to employee benefit obligations
(54,650
)
14,882
(39,768
)
Unrealized gain (loss) on interest rate hedges
(22,500
)
4,766
(17,734
)
$
(124,734
)
$
19,648
$
(105,086
)
December 31, 2018
Gross
Tax Effect
Net Amount
(in thousands)
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
) The following tables presents the changes in accumulated other comprehensive loss by component for the year ended December 31, 2019 and 2018:
Year Ended December 31, 2019
Foreign currency translation adjustments
Amounts related to employee benefit obligations
Unrealized gain (loss) on interest rate hedges
Total
(in thousands)
Beginning balance
$
(53,389
)
$
(37,922
)
$
(3,914
)
$
(95,225
)
Other comprehensive income
before reclassifications
5,805
(7,266
)
(15,627
)
(17,088
)
Amounts reclassified from
accumulated other comprehensive loss
-
5,420
1,807
7,227
Ending balance
$
(47,584
)
$
(39,768
)
$
(17,734
)
$
(105,086
)
Year Ended December 31, 2018
Foreign currency translation adjustments
Amounts related to employee benefit obligations
Unrealized gain (loss) on interest rate hedges
Total
(in thousands)
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
) The following table presents the reclassifications out of accumulated other comprehensive loss during the years ended December 31, 2019, 2018, and 2017:
Amount
from accumulated
Year Ended December 31, 2019
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
$
2,277
Interest expense, net
Tax effect
(470
)
Provision for income taxes
$
1,807
Net of tax
Amortization of employee benefit obligations
Prior service costs
$
330
Other non-operating expense, net
Actuarial losses
7,118
Other non-operating expense, net
Tax effect
(2,028
)
Provision for income taxes
5,420
Net of tax
Total reclassifications for the period
$
7,227
Net of tax
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 |
