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Vulcan International Corporation and Subsidiaries Consolidated Financial Statements December 31, 2016 and 2015 (with Independent Auditors’ Report) @) Chari SCHAEFER HACKETT Cons uae Consias Consolidated Balanco Sheets December 31, 2016 and 2015 2016 2015 Assets Current assets: Cash and cash equivalents $2,959,451 465,070 Marketable secures 1,850,365 1,312,004 ‘Accounts receivable- ‘Trade (less allowance for doubtful accounts - $35,608 in 2016 and 2016) 514,044 509,213 Other (loss allowance for doubtiul accounts - $1,157,389 In 2016 and $1,039,783 in 2015) 10,860 11,827 Inventories £2,875 196,404 Prepald income tax and other expense 411,400 19,732 ‘Assets held for sale 2,645,208 2,607,022 Deferred income taxes 112,192, 4,334,212 “Tole curent axoeis Tei986,452 6.365.274 Property plant and equipment: Land 94,965 94,365 ‘Timberlands and timber cutting rights 725,424 725,424 Buildings and improvements 4,698,050 4,881,818 Machinery and equipment 6.418.833 6,244,308 Construction in progress = _2374574 Total 11,996 672 14,020,584 Less - Accumulated depreciation and depletion (10,901,202) _(10,836,783) Property, plant and equipment-net 7,035,470 3,163,801 Other assets: Marketable securities 197,996,703 113,577,565 Other assets __ 33.737 51,798 Total other assets: 137,970,440 413,620,363 Total assets 8 147,992,962 423,168,498 ‘See accompanying notes to the consolidated financial statements. 2 LLabilties and shareholders’ equity Current Habitties: ‘Notes payable - bank ‘Accounts payable- Trade Other Accrued salaries, wages and commissions Accrued other expenses Total current liabilities Other labiities: Deferred income taxes Other Total other liabilties Shareholders! equity ‘Common stock - no par value; ‘Authorized 2,000,000 shares; 1,989,512 shares issued ‘Additional paid-in capital Retained eamings ‘Accumulated other comprehensive income Less - Common stock in treasury - at cost, 4,087,978 shares in 2016; 1,089,931 shares in 2015, Noncontraling interest in limited lability company Total shareholders’ equity ‘Total llabities and shareholders’ equity ‘See accompanying notes to the consolidated financial statements, Consolidated Balance Sheets (Continued) December 31, 2016 and 2015 2016 $2,014,000 204,839 6,829 90,081 318,517 2,634,266 49,136,675 770,371 41,906,948 249,939 10,822,960 40,856,844 186,286,017 (33,737,278) 103,477,482 (25,332) 103,452,160 $ 147,992,362 2015 2,014,000 259,385 85,700 91,081 569,768, 019,914 33,126,018 671,348 33,797,264 249,939 10,797,680 39,971,133 68,858,778 (33,508,891) 86,368,639 17,479) 26,351,160 123,168,438 3 Consolidated Statements of Income ‘Years Ended December 31, 2016 and 2015 2016 2016 Revenues: Not sales $ 4,016,902 4,064,541 Real estate operations - timber 136,519 (296,084 Real estate operations - commercial buildings 790,328 631,595 ‘Total revenues 4,943,749 4,992,220 Costs and expenses: Cost of seles 3.988.111 3.467.690 Operating expenses 985.360 979,008 General and administrative 2,057,828 2,200,381 Interest expense 36733 __27,907 Total costs ond expenses Sasr0s | “B7ss.008 Other income: Dividends and interest 3,019,659 2,879,081 Net gain on disposal of property, plant, and equipment "200,052 40,000 ‘Total other income 3,219,711 2,919,044 1726427 1,185,305 178,488) 72,967 Income before income taxes Income tax (expense) benefit Income before noncontroling interest, 1,607,938 1,228,962 Noncontroling interest 7,853 6724 Net income $ 1815792 1,235,086 Net income per common share: Bagie and diluted $ 477 4.35 See accompanying notes to the consolidated financial statements. 4 Consolidated Statements of Comprehensive Income ‘Years Ended December 31, 2016 and 2015 Net income Other comprehensive income (loss): ‘Net unrealized gain on available-for-sale securities (net of tax of $8,363,119 in 2016; $194,324 in 2015) ‘Change in unrecognized loss on pension plan (net of tax of {$98,797 in 2016; $276,052 in 2015) Reolassitication adjustments for items included in net income: Prior service cost (net of tax of $30,772 in 2016 and 2015) Amortization of pension plan net actuarial loss (net of tax ‘of $166,907 in 2016; $156,696 in 2015) Total other comprehensive income ‘Total comprehensive income 2016 3 _1,815,792 16,234,290 (191,782) 59,734 323,097 16,426,238 $ 48,042,031 2015 1.235.086 377.219 (633,923) 59,734 304,179 207,209 1,442,205 ‘See accompanying notes to the consolidated financial statements. s URL PSIBPIIOSUED tp o} SBjOU BulkLEdunaTe 29g CE UATE Welt Tee Wea weiwo Rear: 9102 'L¢ Jequiacag ye eougeg ea ysez9qu Bumoquoovou wi eBueys (oz8'e) (002) o8z'sz ‘seueys Ainsean Jo couenss| Asz'eez elie ‘yooys uowUIES yo Suogdurepey (:g0'0e2) ‘sueys 19d 08'0S - PeePeP spuepIAId eez'ozy'ot. ‘ewoou! anisusyasdiwos 10490 TBL'SLOF @WODU! 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FON w'z9s's8 (Ssz'o1) Oly ZIs'cs LeL'pa0'L 69S'LS9'89 bzeZzv'ee ©=—SOs'9ev'OL © eee'eyz S402 ‘| Arenuep ye eouejeg: mans Senn eee ee SS SS ES sa a iow Payenuncoy 232 PUB 8402 ‘Le saquesed pepLa S189, 1ba siepiouaieus jo suewereig poyeplosuoD JeIPISANS pue woRBIodion jeuoeweY| UEDIMA Consolidated Statements of Cash Flows ‘Years Ended December 31, 2016 and 2015 2016 2015 Cash flows from operating activites: Cash received from customers $ 4,939,588 4,983,640 Cash paid to suppliers and employees: (5,980,582) (6,233,816) Dividends and interest received 3,019,659 2,879,041 Interest pald (32,751) (28,058) Income taxes paid (675,000) _ (328.009) Net cash flows from operating activities q2zrog14 “1,772,807 Cash flows from investing activites: Proceeds from sale of property, plant, and equipment 2,707,073 40,000 Purchase of property, plant, and equipment (540,018) (4,050,675) Net cash fiows from investing activities 2,167,055 (1,010,675) Cash flows from financing activities: Borrowings under credit agreements = 100,000 Issuance of treasury shares 24,750 : Redemptions of common stock (238,257) - ‘Cash dividends paid (730,081) (686,574) Net cash flows from financing activities (943,588) (586,574) Net change in cash and cash equivalents 2,494,981 (524,442) Cash and cash equivatents at beginning of year 405,070 _769512 Cash and cash equivalents at end of year $ 2,960,451 465,070 Reconciliation of net income to net cash flows from operating activities: Net income $ 1615,792 1,236,086 ‘Adjustments: Depreciation, amortization and depletion 143,142 222,559 Deferred income tax benefit (430,425) (629,980) Gain on sale of property, plant, and equipment (200,052) (40,000) ‘Stock compensation programs 10,400 14,700 Pension expense 368,380 211,818 Noncontroliing interest (7,853) (6,724) ‘Changes in operating assets and labios: ‘Accounts receivable (4.181) (6.880) Inventories 113528 (103,627) ‘Accounts payable, accrued expenses and other assets, net 957,838) _ 277,555 Not cash flows from operating activities $ 4270914 _4,272.007 ‘See accompanying notes to the consolidated financial statements 7 Notes tothe Consoitated Financial Statements December 31,2016 and 2016 Earnings por share Basic earnings per share is computed on the basis of the weighted average number of common shares ‘outstanaing during the year. Diluted earnings per share include the effect of any stock options ‘outstanding during the year. Sales taxes ‘Sales, use and similar taxes assessed by governmental authorities on revenue-producing transsctions ‘are presented net of taxes collected from customers in the consolidated statements of income. ‘Subsequent events ‘The Company has evaluated the impact of events that have occurred subsequent to Decembor 31, 2016 through April 24, 2017, the date the consolidated financial statements were available to be issued, for purposes of recognition and disclosure in the consolidated financial statements, 2, MARKETABLE SECURITIES: ‘The Company's investment in marketable securities (level 1 securities) consists of the following at December 31: Gross Gross Unrealized Unrealized Fair Gost Gains Losses Value 2018 Current $ 76581 1,473,784 = 1/850,365 Long-term S470,794 132,465,909 137,998,208 $5,547,375 133,999,693 — 132482068 2016 Current $ 76.581 1,235,513 - 1,312,004 Long-term 470794 108,106.71 113,67.585 $5,547.375 100.342.284 — 1isssesse \Net unrealized holding gains are included, net of deferred income tax of $45,538,495 and $37,176,376 at December 31, 2016 and 2015, respectively, as @ component of accumulated other comprehensive ” Notes to the Consolidated Financial Statements December 31, 2016 and 2015 3. INVENTORIES: Inventories were classified as follows at December 31) 20168 2015 Finished goods $10,168 33,242 Work in process 16,724 52,048 Raw materials: 85.983 dio2ta Total $ 82.875 126.404 4. NOTES PAYABLE: The Company maintains a revolving credit agreement with a bank that provides for borrowings of up to {$10,000,000 through October 31, 2017. Borrowings under the agreement were $2,014,000 at December 31, 2016 and 2015. Borrowings are secured by certain marketable equity securties with a market value of approximately $44,277,987 at December 31, 2016. Interest is payable monthly at @ rate chosen by the ‘Company for each advance based on the bank's prime rate, or LIBOR plus 1.25%, or the federal funds rate plus 1.75% (1.98% at December 31, 2016) ‘The Company also maintains a revolving credit agreement with a bank that provides for additional short- term borrowings of up to $5,000,000 through October 31, 2017. Interest is payable monthly at a rate chosen by the Company for each advance based on the bank's prime rate, or LIBOR plus 1.65%. There ‘were no borrowings outstanding under this agreement at December 31, 2016 or 2015. 6, ACCUMULATED OTHER COMPREHENSIVE INCOM! ‘Changes in accumulated other comprehensive income by component consists ofthe folowing, net of tax: Unrealized Unrealized Loss Accumulated Gainson and Prior Other Marketable Service Cost on Comprehensive ‘Ssourties Pension Liability Income Balance at January 1, 2015 $71,788,690 (3.137.121) 68,651,569 Before reclassification adjustment 377219 (633,923) (186,704) Reclassification adjustment = 363,913 — 388.013 ‘Other comprehensive income wz © 170010) | 207.200 Balance at December 31, 2015 72,165,909 (3.307.131) §8,858.778 Belore rectassification adjustment 16,234,290 (191,782) 16,042,508 Reclassification adjustment ———= 383731 _ 983,731 Other comprehensive income 16234200 191,949 16.46.2309 Balance st December 31, 2016 $88,400,199 (3,115,182) 85.285.017 2 ‘Notes to the Consolidated Financial Statements December 31, 2016 and 2015 Reclassfcations from accumulated other comprehensive income during 2016 and 2015 that affected general and administrative expenses in the consolidated statements of income consist ofthe following, net of tax: 2016 (2015 Prior service costs. $3 59,734 59,734 Amortization of pension plan net actuarial oss 323,997, 304,179 Nat reclassification adjustments $ 383.731 263.013 6 ASSETS HELD FOR SALE: Assets held for sale at December 31, 2016 consists of a residential property in Florida for which the ‘Company completed construction in May 2018. The property is ready for occupancy and is actively being marketed for sale. Assets held for sale as of December 31, 2015 consisting of land, building, anc ts, In Cincinnati, Ohio with a net book value of $2,507,022 were sold in February 2016 for a ‘gain of $200,082. 7. LEASES: ‘The Company leases office space to various tenants under operating leases expiring from 2017 to 2021, ‘The carrying value of the property held for lease at December 31 was as follows: m6 2018 Land $ 47,897 47,897 Buildings and tenant improvements erg9ss = 4.748.054 ‘918266 1,795,954 Lees accumulated depreciation and amortization (4512600 © 14a1.969) Property held fr lease, net $ 405685 _364.082 Minimum future rental income under non-cancelabe leases as of December 31,2016, i es flows: Year Ending, 2017 5 661,768 2016 418.181 2018 322/823 2020 241,892 2021 94.806 Total s 76.470 8, EMPLOYEE BENEFIT PLANS: ‘The Company maintains a noncontributory defined benefit pension pian for certain eligible salaried ‘employees. The measurement date for obligations and assets is December $1. The accrued pension abit i inclced in other Habities. 8 Notes to the Consolidated Financial Statements December 31, 2016 and 2015 ‘The funded slatus and amounts reported in the accompanying consolidated financial statements consisted of the following at December 31: 2018 2015 Projected benef obigation $8015570 9.153.908 Fair value of plan assets 8,090,753 8.526.719 ‘Accrued pension Habity $1461. © 821.269 items not yet recognized as a component of net perodie pension cost Unrecognized prior service costs $ esis 153,440 Unrecognized net loss 4,657,034 4,857,359 "Amount recognized in accumulated other comprehensive income sazies7Z — 5.010.808 Accumulated benefit obligation F $8,022,448 8,300,604 Benefts paid during the yoar Sie47er 815.986 Periodic pension expense ‘$388,980 261.815 Weighted average assumptions used to determine the benefit obligation at December 31 were as follows: 2008 2018 Discount rate 370% = 391% 400% 4.00% Rate of compensation increase Weighted average assumptions used to determine net periodic benefit cost forthe years ended December 31 were as follows: 2016 2015 Discount rate 3.91% 3.67% Expected long-term rate of retun on plan assets. 8.00% 8.00% 4.00% 4.00% Rate of compensation increase “The unrecognized prior service costs and unrecognized net loss is included as a component of shareholders’ equity; not of tax of $1,604,792 and $1,703,675 at December 31, 2016 and 2016, respectively ‘The unrecognized net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $540,890 end $56,104, respectively, 4 ‘Notes fo the Consolidated Financial Statements December 31, 2018 and 2015 ‘The basis of the long-term rate of return assumption reflects the plan's targeted and current asset mix of approximately 30% to 40% debt securities and 60% to 70% equity securities. It ls assumed that the pian’s investment portfolio wil be adjusted periodically to maintain the current ratio of debt and equity ‘securities. Additional consideration is given to the plan’s historical returns 2s well as future long range projections of investment returns for each asset category. There is an acceptable variation of 5% from the target allocation provided that such variation occurs because of market changes. Further, the ‘Company has advised the investment manager that, despite such market chenges, such variations should be adjusted to the basic targets within a reasonable time-frame. Equity Investments are required tobe in a diversified portolio of Large Cap, Mid Cap, Small Cap and international equities. Fixed income Investments must be “investment grade,” ‘The fair values of the Company's pension plan assets, determined using level 1 inputs based on quoted prices in active markets that the securities trade were as follows at December 31: 2018 2018 Money market funds é $236,918 282,684 US. agency securities 2,981 8,732 Common stock 2,812,168 2,705,622 Registered investment companies $,039,018 5.532.701, ‘$ 8.080.753 828.219 ‘The Plan's asset allocation at December 31 by asset category is a follows 2016 2018 ‘Asset Category Equity securities 74% 74% Debt securities 23% 23% Other 2% —3% Total ioo% 0% “The following benefit payments, which reflect expected future service, are expected to be paid as follows for the years ending December 31: Year Ending 2017 $ 720,000 2018 676,000 2019 638,000 2020 637,000 2021 609,000 2022-2026 2,581,000 ‘The Company makes contributions to the plan based on funding requirements. No contributions were ‘required in 2016, The Company contributed $50,000 to the plan during 2016. Company contributions to Its defined contribution plans were $41,700 and $38,100 in 2016 and 2015, respectively. 18 Notes to the Consolidated Financial Staternonts. December 31, 2016 and 2016 ‘The Company maintains @ stock option plan that provides for the granting of options to certain key employees to purchase shares of treasury stock at such a price as may be determined by the Board of Directors. No option may be granted for longer than ten years and ifthe employment of the optionee is terminated for any reason other than death within four years of an option grant, the option is terminated. ‘There were no options outstanding or exercised under this plan in 2016 or 2015. Jn May 2008, the Compeny’s Board of Directors amended and readopted a November 2001 resolution of its executive committee making treasury shares available for purchase by directors, including directors of ‘wholly-owned subsidiaries, ata price equal tothe lowest price for which the stock fas sold during the fifteen trading days prior to the date that the director notes an officer of the Company of their desi to purchase up to @ maximum of 25,000 shares per year. Shares purchased under this policy may not be transferred for a period of six months to anyone other than the Company, another director, or in the event of the death ofthe director, to the director's estate. The resolution provided for sald policy to continue Until rescinded by the Board of Directors. During 2016, 600 shares valued at $24,750 were purchased by ‘a director. During 2018, there were no shares purchased by directors. ‘The Compensation Committee of the-Board of Directors awarded key employees of the Company, ‘additional compensation for their services, 200 and 250 shares of common stock valued at $10,400 and $14,700, in 2016 and 2016, respectively, based on the fair value of the Company's stock on the award date. 9. INCOME TAXES: ‘The income tax expense (benefit) consists of the following at December 31: 2016 2015 Current federal tax expense $548,913 457,013 Deferred federal tax benefit (430.426) (629,980) Income tax expense (benefit) S$ 118.488 {1296 ‘The Company's net deferred tax liability consists of the following at December 31: 2018 2015, Gross deferred tax assets $7,074,467 6,874,974 ‘Gross deferred tax liabilities (46,897,850) (38,688,780) Net deferred tax liability $ (9,823,383) = (31,791,806) ‘The income tax provision differs from the expense thal would resutt from applying statutory tax rates to Income before income taxes due primarily to the dividends-received deduction 16 ‘Notes to the Consolidated Financial Statements December 31, 2016 and 2015 ‘As of December 31, 2016, the Company had minimum tax credit carryforwards of $3,600,000 which have 10 fixed expiration date. As of December 31, 2016, the Company had net operating loss carryforwards of {$3,810,000 for federal income tax purposes which expire as follows: 2025 $341,000 2028, 1,204,000 2029 281,000 2031 637,000 2032 163,000 2033, 390,000 2034 511,000, 2035 326,000 2038 88,000 $ 3.910.000 10. RELATED PARTY TRANSACTIONS: ‘The Company utlizes the services of an attorney, for certain legal matters, who is also a director. Total fees paid tothe director in connection with legal services were $86,000 and $228,000 forthe respective years ended December 31, 2018 and 2015. There was approximately $42,000 due to the director and included in accrued other expenses at December 31, 2016. 14, FINANCIAL INSTRUMENTS AND CONCENTRATIONS: Financial instruments which potentially subject the Company to concentrations of credit risk are cash and cash equivalents which may, at times, exceed federally insured limits, notes receivable and marketable ‘securities. The Company places its cash and cash equivalents with high-credi-quality financial institutions. The Company does not believe significant concentrations of credit risk exists with respect to these financial instruments. Marketable securities are exposed to various risks such as interest rate, market and credit reks. Approximately 64% of marketable securities are equity investments in common stock of regional nancial institutions. Due to the level of risk associated with certain investment secures, itis reasonably possible that changes in the values of investment securties wil occur in the near term and those changes could ‘materially affect the amounts reported in the consolidated balance sheets and consolidated statements of ‘comprehensive income, ‘At December 31, 2016, 50% of the Company's labor force was subject to collective bargaining ‘agreements which expire in October, 2017. In 2016, 38% of net sales were derived from two customers. W