UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19687
SYNALLOY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
57-0426694
(I.R.S. Employer Identification No.)
4510 Cox Road, Suite 201, Richmond, Virginia, 23060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 822-3260
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered:
Common Stock, $1.00 Par Value
SYNL
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Based on the closing price as of June 30, 2019, which was the last business day of the registrant's most recently completed second fiscal quarter, the
aggregate market value of the common stock held by non-affiliates of the registrant was $77.0 million.
The number of shares outstanding of the registrant's common stock as of March 4, 2020 was 9,117,657.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2020 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.
Synalloy Corporation
Form 10-K
For Period Ended December 31, 2019
Table of Contents
Part I
Part II
Part III
Part IV
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6
Item 7
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
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1
Forward-Looking Statements
This Annual Report on Form 10-K includes and incorporates by reference "forward-looking statements" within the meaning of
the federal securities laws. All statements that are not historical facts are forward-looking statements. The words "estimate,"
"project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may"
and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and
uncertainties, including without limitation those identified below, which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The
following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic
conditions; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased
costs; raw materials availability; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies;
customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in nickel and oil
prices; unforeseen delays in completing the integrations of acquisitions; risks associated with mergers, acquisitions, dispositions
and other expansion activities; financial stability of our customers; environmental issues; negative or unexpected results from tax
law changes; unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk; inability to
comply with covenants and ratios required by our debt financing arrangements; ability to weather an economic downturn; loss of
consumer or investor confidence and other risks detailed in Item 1A, Risk Factors, in this Annual Report on Form 10-K and from
time-to-time in Synalloy Corporation's Securities and Exchange Commission filings. Synalloy Corporation assumes no obligation
to update any forward-looking information included in this Annual Report on Form 10-K.
PART I
Item 1 Business
Synalloy Corporation, a Delaware corporation, was incorporated in 1958 as the successor to a chemical manufacturing business
founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The
Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060. Unless indicated otherwise, the
terms "Synalloy", "Company," "we" "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals
Segment. The Metals Segment operates as three reporting units, all International Organization for Standardization ("ISO") certified
manufacturers, including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American
Stainless Tubing, LLC ("ASTI"), which began operations effective January 1, 2019 pursuant to our acquisition of substantially
all of the assets of American Stainless Tubing, Inc. ("American Stainless") (see Note 15 to the Consolidated Financial Statements),
Palmer of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations
manufactures stainless steel, galvanized, ornamental stainless steel tubing, and other alloy pipe and tube. Palmer manufactures
liquid storage solutions and separation equipment. Specialty is a master distributor of seamless carbon pipe and tube. The Metals
Segment's markets include the oil and gas, chemical, petrochemical, pulp and paper, mining, power generation (including nuclear),
water and waste water treatment, liquid natural gas ("LNG"), brewery, food processing, petroleum, pharmaceutical, automotive
& commercial transportation, appliance, architectural, and other heavy industries. The Specialty Chemicals Segment operates as
one reporting unit which includes Manufacturers Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap
and Chemical Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling"). The Specialty Chemicals Segment produces specialty
chemicals for the chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress,
furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated
fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional chemical companies and
contracts with other chemical companies to manufacture certain, pre-defined products.
General
Metals Segment – This segment is comprised of four wholly-owned subsidiaries: Synalloy Metals, Inc., which owns 100 percent
of the membership interests of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman
and Statesville, North Carolina; Palmer, located in Andrews, Texas; and Specialty, located in Mineral Ridge, Ohio and Houston,
Texas. Two subsidiaries, BRISMET and ASTI, are aggregated as one reporting unit called Welded Pipe and Tube Operations, with
Palmer and Specialty making up the segment's other two reporting units.
BRISMET manufactures welded pipe and tube, primarily from stainless steel, duplex, and nickel alloys. Pipe is produced in sizes
from 3/8 inch to 120 inches in diameter and wall thickness up to one and one-half inches. Eighteen-inch and smaller diameter pipe
is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than 18 inches in diameter is formed on
presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot lengths. However, BRISMET
has unusual capabilities in the production of long length pipe without circumferential welds. This can reduce the installation cost
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for the customer. Lengths up to 60 feet can be produced in sizes up to 18 inches in diameter. In larger sizes, BRISMET has a
unique ability among domestic producers to make 48-foot lengths in diameters up to 36 inches. Over the past four years, BRISMET
has made substantial capital improvements, installing an energy efficient furnace to anneal pipe quicker while minimizing natural
gas usage; system improvements in pickling to maintain the proper chemical composition of the pickling acid; and developing a
heavy wall/quick turn welded pipe production shop by adding a 4,000 tonne press along with all necessary ancillary processes.
BRISMET's Munhall facility manufactures stainless welded pipe as well as new product offerings in welded tubing in diameters
from 5/8 inch to eight inches and gauges from 0.028 inch to 1/4 inch. Additionally, the Munhall facility produces galvanized
carbon tubing in custom sizes. Munhall was designed for improved product flow and the latest technology including laser welding
and in-line bright annealing.
ASTI is a leading manufacturer of high-end ornamental stainless steel tubing, supplying the automotive, commercial transportation,
marine, food services, construction, furniture, healthcare, and other industries. Operating facilities are located in Troutman and
Statesville, North Carolina. ASTI combines the use of superior metal quality with in-house capabilities in slitting and welding,
along with patented and proprietary finishing capabilities and the highest levels of customer service and technical support to
provide the customer with the highest quality ornamental product available in the market. Product range includes ½” OD to 2-1/2”
OD up to 5” OD, in a variety of shapes, including squares, rectangles and ellipticals. Refer to Note 15 to the Consolidated Financial
Statements for further details.
Palmer is a manufacturer of fiberglass and steel storage tanks for the oil and gas, waste water treatment and municipal water
industries. Located in Andrews, Texas, Palmer is ideally located in the heart of a significant oil and gas production territory. Palmer
produces made-to-order fiberglass tanks, utilizing a variety of custom mandrels and application specific materials. Its fiberglass
tanks range from two feet to 30 feet in diameter at various heights. Most of these tanks are used for oil field waste water capture
and are an integral part of the environmental regulatory compliance of the drilling process. Each fiberglass tank is manufactured
to American Petroleum Institute Q1 standards to ensure product quality. Palmer's steel storage tank facility enables efficient,
environmentally compliant production with designed-in expansion capability to support future growth. Finished steel tanks range
in size predominantly from 50 to 1,500 barrels and are used to store extracted oil.
Specialty is a leading master distributor of hot finish, seamless, carbon steel pipe and tubing, with an emphasis on large outside
diameters and exceptionally heavy wall thickness. Specialty's products are primarily used for mechanical and high-pressure
applications in the oil and gas, capital goods manufacturing, heavy industrial, construction equipment, paper and chemical
industries. Operating from facilities located in Mineral Ridge, Ohio and Houston, Texas, Specialty is well-positioned to serve the
major industrial and energy regions and successfully reach other target markets across the United States. Specialty performs value-
added processing on approximately 80 percent of products shipped, which would include cutting to length, heat treatment, testing,
boring and end finishing and typically processes and ships orders in 24 hours or less. Based upon its short lead times, Specialty
plays a critical role in the supply chain, supplying long lead-time items to markets that demand fast deliveries, custom lengths,
and reliable execution of orders.
In order to maintain strong business relationships, the Metals Segment uses only a few raw material suppliers. Ten suppliers furnish
approximately 87 percent of total dollar purchases of raw materials, with one supplier furnishing 34 percent of material purchases.
However, the Company does not believe that the loss of this supplier would have a materially adverse effect on the Company as
raw materials are readily available from a number of different sources, and the Company anticipates no difficulties in fulfilling
its requirements.
Specialty Chemicals Segment – This segment consists of the Company's wholly-owned subsidiary MS&C. MS&C owns 100
percent of the membership interests of MC, which has a production facility in Cleveland, Tennessee. This segment also includes
CRI Tolling which is located in Fountain Inn, South Carolina. MC and CRI Tolling are aggregated as one reporting unit and
comprise the Specialty Chemicals Segment. Both facilities are fully licensed for chemical manufacture. MC manufactures
lubricants, surfactants, defoamers, reaction intermediaries, and sulfated fats and oils. CRI Tolling provides chemical tolling
manufacturing resources to global and regional companies and contracts with other chemical companies to manufacture certain
pre-defined products.
MC produces over 1,100 specialty formulations and intermediates for use in a wide variety of applications and industries. MC's
primary product lines focus on the areas of defoamers, surfactants, and lubricating agents. These three fundamental product lines
find their way into a large number of manufacturing businesses. Over the years, the customer list has grown to include end users
and chemical companies that supply paper, metal working, surface coatings, water treatment, paint, mining, oil and gas, and
janitorial applications. MC's capabilities also include the sulfation of fats and oils. These products are used in a wide variety of
applications and represent a renewable resource, animal and vegetable derivatives, as alternatives to more expensive and non-
renewable petroleum derivatives.
3
MC's strategy has been to focus on industries and markets that have good prospects for sustainability in the U.S. in light of global
trends. MC's marketing strategy relies on sales to end users through its own sales force, but it also sells chemical intermediates to
other chemical companies and distributors. It also has close working relationships with a significant number of major chemical
companies that outsource their production for regional manufacture and distribution to companies like MC. MC has been ISO
registered since 1995.
The Specialty Chemicals Segment maintains six laboratories for applied research and quality control which are staffed by eleven
employees.
Most raw materials used by the segment are generally available from numerous independent suppliers and approximately 52
percent of total purchases are from its top 10 suppliers. While some raw material needs are met by a sole supplier or only a few
suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements.
See Note 13 to the Consolidated Financial Statements, which are included in Item 8 of this Form 10-K, for financial information
about the Company's segments.
Sales and Distribution
Metals Segment – The Metals Segment utilizes separate sales organizations for its different product groups. Welded Pipe & Tube
Operations include stainless steel pipe and tube, sold worldwide under the BRISMET trade name and ornamental stainless tube,
sold under the ASTI trade name in the U.S. and Canadian markets. Producing sales and providing service to the distributors and
end-user customers are three outside sales employees, 14 independent manufacturers' representative, and 12 inside sales employees.
Palmer employs three sales professionals that manage the relationship with customers and partnerships to identify and secure new
sales. Additionally, the Metals Segment President assists in account relationship management with large customers. Customer
feedback and in-field experience generate product enhancements and new product development.
Approximately 80 percent of Specialty's pipe and tube sales are to North American pipe and tube distributors with the remainder
comprised of sales to end use customers. In addition to Specialty's President, Specialty utilizes two manufacturers' representatives
and seven inside sales employees, whom are located at both locations, to obtain sales orders and service its customers.
There were no customers representing more than 10 percent of the Metals Segment's revenues for 2019, 2018 or 2017.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by five full-time outside
sales employees and eleven manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted
for approximately 16 percent of the segment's revenues for 2019 and 2018, respectively, and 23 percent of the segment's revenues
for 2017. In 2018, the concentration of sales to this customer declined as a result of this customer moving production of certain
products previously produced and sold by the Specialty Chemicals Segment in-house.
Competition
Metals Segment – Welded Pipe & Tube Operations produce the largest sales volume group of products in the Metals Segment.
For stainless steel and galvanized pipe, although information is not publicly available regarding the sales of most other producers
of these products, management believes that the Company is one of the largest domestic producers of such pipe. These commodity
products are highly competitive with twelve known domestic producers, including the Company, and imports from many different
countries. ASTI is a leading manufacturer of high-end ornamental stainless steel tubing, supplying the automotive, commercial
transportation, marine, food services, construction, furniture, healthcare and other industries. ASTI combines the use of superior
metal quality with in-house capabilities in slitting and welding, along with patented and proprietary finishing capabilities and the
highest levels of customer service and technical support to provide customers with the highest quality ornamental product available
in the market. There are three known significant U.S. ornamental tubing manufacturers competing in the markets in which ASTI
participates.
Due to the size of the tanks produced and shipped to its customers, the majority of Palmer's products is sold within a 300-mile
radius from its plant in Andrews, Texas. There are currently 18 tank producers, with similar capabilities, servicing that same area.
Specialty is a leader in the specialized products segment of the pipe and tube market by offering an industry-leading in-stock
inventory of a broad range of high quality products, including specialized products with limited availability. Specialty's dual
branches have both common and regional-specific products and capabilities. There are four known significant pipe and tube
distributors with similar capabilities to Specialty.
Specialty Chemicals Segment – The Company is the sole producer of certain specialty chemicals manufactured for other
companies under processing agreements and also produces proprietary specialty chemicals. The Company's sales of specialty
4
products are insignificant compared to the overall market for specialty chemicals. The market for most of the products is highly
competitive and many competitors have substantially more resources than the Company.
Mergers, Acquisitions and Dispositions
The Company is committed to a long-term strategy of (a) reinvesting capital in our current business segments to foster their organic
growth, (b) disposing of underperforming business units, and (c) completing acquisitions that expand our current business segments
or establish new manufacturing platforms. Targeted acquisitions are priced to be economically feasible and focus on achieving
positive long-term benefits. These acquisitions may be paid for in the form of cash, stock, debt or a combination thereof.
On July 1, 2018, BRISMET acquired Marcegaglia USA, Inc.'s ("MUSA") galvanized tube assets and operations ("MUSA-
Galvanized") located in Munhall, PA. The purpose of the transaction was to enhance the Company's on-going business with
additional capacity and technological advantages. The transaction was funded through an increase to the Company's credit facility
(refer to Note 5 to the Consolidated Financial Statements). The purchase price for the transaction totaled $10.4 million. In connection
with the MUSA-Galvanized acquisition, the Company is required to make quarterly earn-out payments for a period of four years
following closing, based on actual sales levels of galvanized pipe and tube. The tangible assets purchased and liabilities assumed
from MUSA include accounts receivable, inventory, equipment, and accounts payable.
On January 1, 2019, ASTI completed the American Stainless acquisition. The purpose of the transaction was to extend and enhance
the Company's on-going business with additional capacity and new technological advantages in the production of stainless
ornamental tubing. The purchase price was $21.9 million. American Stainless will also receive quarterly earn-out payments for a
period of three years following closing. Synalloy funded the acquisition with a new five-year $20 million term note and a draw
against its $100 million asset based line of credit, both with Synalloy’s current lender (see Note 5 to the Consolidated Financial
Statements). The tangible assets purchased and liabilities assumed from American Stainless include accounts receivable, inventory,
equipment, and accounts payable.
Environmental Matters
Environmental expenditures that relate to an existing condition caused by past operations and do not contribute to future revenue
generation are expensed. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs of
these assessments and/or cleanups can be reasonably estimated. Changes to laws and environmental issues, including climate
change, are made or proposed with some frequency and some of the proposals, if adopted, might directly or indirectly result in a
material reduction in the operating results of one or more of our operating units. We are presently unable to quantify this risk due
to such uncertainties.
Seasonal Nature of the Business
With the exception of Palmer and Specialty's Houston location, which primarily serves the oil and gas industry, the Company’s
businesses and products are generally not subject to any seasonal impact that results in significant variations in revenues from one
quarter to another. Fourth quarter revenue and profit for Palmer and Specialty Houston can be as much as 25 percent below the
other three quarters due to vacation schedules for customer field crews working at the drill sites.
Backlogs
The Specialty Chemicals Segment operates primarily on the basis of delivering products soon after orders are received. Accordingly,
backlogs are not a factor in this business. The same applies to seamless, carbon steel pipe and tubing sales in the Metals Segment.
However, backlogs are important in the Metals Segment's welded pipe & tube and tank manufacturing operations, where both
businesses incur significant dollar value of committed orders in advance of production. Its backlog of open orders for welded
stainless steel pipe were $35.4 million and $31.2 million and for tanks were $5.8 million and $20.7 million at the end of 2019 and
2018, respectively.
Employee Relations
At December 31, 2019, the Company had 606 employees. The Company considers relations with employees to be strong. The
number of employees of the Company represented by unions, located at the Bristol, Tennessee, Mineral Ridge, Ohio, and Munhall,
Pennsylvania facilities, is 247, or 41 percent of the Company's employees. They are represented by three locals affiliated with the
United Steelworkers. Collective bargaining contracts for the Steelworkers expire in July 2024 (Bristol, TN), June 2020 (Mineral
Ridge, OH), and January 2023 (Munhall, PA).
5
Financial Information about Geographic Areas
Information about revenues derived from domestic and foreign customers are set forth in Note 13 to the Consolidated Financial
Statements.
Available information
The Company electronically files with the Securities and Exchange Commission ("SEC") its annual reports on Form 10-K, its
quarterly reports on Form 10-Q, its periodic reports on Form 8-K, amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and proxy materials pursuant to Section 14 of the 1934
Act. The SEC maintains a site on the Internet, www.sec.gov, which contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The Company also makes its filings available, free of charge,
through its Web site, www.synalloy.com, as soon as reasonably practical after the electronic filing of such material with the SEC.
The information on the Company's Web site is not incorporated into this Annual Report on Form 10-K or any other filing the
Company makes with the SEC.
Item 1A Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and
financial condition. Set forth below are descriptions of those risks and uncertainties that we believe to be material, but the risks
and uncertainties described are not the only risks and uncertainties that could affect our business. Reference should be made to
"Forward-Looking Statements" above, and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below.
The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating
uncertainty regarding future profitability. Various changes in general economic conditions affect the industries in which our
customers operate. These changes include decreases in the rate of consumption or use of our customers’ products due to economic
downturns. Other factors causing fluctuation in our customers’ positions are changes in market demand, capital spending, tariff
induced price changes, lower overall pricing due to domestic and international overcapacity, lower priced imports, currency
fluctuations, and increases in use or decreases in prices of substitute materials. As a result of these factors, our profitability has
been and may in the future be subject to significant fluctuation.
Domestic competition could force lower product pricing and may have an adverse effect on our revenues and profitability. From
time-to-time, intense competition and excess manufacturing capacity in the commodity stainless and galvanized steel industry
have resulted in reduced selling prices, excluding raw material surcharges, for many of our stainless steel products sold by the
Metals Segment. In order to maintain market share, we would have to lower our prices to match the competition. These factors
have had and may continue to have an adverse impact on our revenues, operating results and financial condition and may continue
to do so in the future.
Our business, financial condition and results of operations could be adversely affected by an increased level of imported products.
Our business is susceptible to the import of products from other countries, particularly steel products. Import levels of various
products are affected by, among other things, overall world-wide demand, lower cost of production in other countries, the trade
practices of foreign governments, government subsidies to foreign producers, the strengthening of the U.S. dollar and
governmentally imposed trade restrictions in the United States. Although imports from certain countries have been curtailed by
anti-dumping duties, imported products from other countries could significantly reduce prices. Increased imports of certain
products, whether illegal dumping or legal imports, could reduce demand for our products in the future and adversely affect our
business, financial position, results of operations or cash flows.
6
The Specialty Chemicals Segment uses significant quantities of a variety of specialty and commodity chemicals in its manufacturing
processes, which are subject to price and availability fluctuations that may have an adverse impact on our financial performance.
The raw materials we use are generally available from numerous independent suppliers. However, some of our raw material needs
are met by a sole supplier or only a few suppliers. If any supplier that we rely on for raw materials ceases or limits production,
we may incur significant additional costs, including capital costs, in order to find alternate, reliable raw material suppliers. We
may also experience significant production delays while locating new supply sources, which could result in our failure to timely
deliver products to our customers. Purchase prices and availability of these critical raw materials are subject to volatility. Some
of the raw materials used by the Specialty Chemicals Segment are derived from petrochemical-based feedstock, such as crude oil
and natural gas, which have been subject to historical periods of rapid and significant movements in price. These fluctuations in
price could be aggravated by factors beyond our control such as political instability, and supply and demand factors, including
Organization of the Petroleum Exporting Countries ("OPEC") production quotas and increased global demand for petroleum-
based products. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis,
at prices and other terms acceptable, or at all. If suppliers increase the price of critical raw materials, we may not have alternative
sources of supply. We attempt to pass changes in the prices of raw materials along to our customers. However, we cannot always
do so, and any limitation on our ability to pass through any price increases could have an adverse effect on our financial performance.
Any significant variations in the cost and availability of our specialty and commodity materials may negatively affect our business,
financial condition or results of operations, specifically for the Specialty Chemicals Segment.
We rely on a small number of suppliers for our raw materials and any interruption in our supply chain could affect our operations.
In order to foster strong business relationships, the Metals Segment uses only a few raw material suppliers. During the year ended
December 31, 2019, 10 suppliers furnished approximately 87 percent of our total dollar purchases of raw materials, with one
supplier providing 34 percent. However, these raw materials are available from a number of sources, and the Company anticipates
no difficulties in fulfilling its raw materials requirements for the Metals Segment. Raw materials used by the Specialty Chemicals
Segment are generally available from numerous independent suppliers and approximately 52 percent of total purchases were made
from our top 10 suppliers during the year ended December 31, 2019. Although some raw material needs are met by a single supplier
or only a few suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements for the Specialty Chemicals
Segment. While the Company believes that raw materials for both segments are readily available from numerous sources, the loss
of one or more key suppliers in either segment, or any other material change in our current supply channels, could have an adverse
effect on the Company’s ability to meet the demand for its products, which could impact our operations, revenues and financial
results.
A substantial portion of our overall sales is dependent upon a limited number of customers, and the loss of one or more of such
customers would have a material adverse effect on our business, results of operation and profitability. The products of the Specialty
Chemicals Segment are sold to various industries nationwide. The Specialty Chemicals Segment has one customer that accounted
for approximately 16 percent of revenues for 2019 and 2018, respectively, and 23 percent of revenues for 2017. The concentration
of sales to this customer declined as a result of this customer moving production of certain products previously produced and sold
by the Specialty Chemicals Segment in house. The loss of this customer would have a material adverse effect on the revenues of
the Specialty Chemicals Segment of the Company.
There were no customers representing more than 10 percent of the Metals Segment's revenues in 2019, 2018, or 2017. Palmer and
Specialty, which are a part of the Metals Segment, sell much of their products to the oil and gas industry. Any change in this
industry, or any change in this industry’s demand for their products, would have a material adverse effect on the profits of the
Metals Segment and the Company.
Our operating results are sensitive to the availability and cost of energy and freight, which are important in the manufacture and
transport of our products. Our operating costs increase when energy or freight costs rise. During periods of increasing energy and
freight costs, we might not be able to fully recover our operating cost increases through price increases without reducing demand
for our products. In addition, we are dependent on third party freight carriers to transport many of our products, all of which are
dependent on fuel to transport our products. The prices for and availability of electricity, natural gas, oil, diesel fuel and other
energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic
factors beyond our control. Disruptions in the supply of energy resources could temporarily impair the ability to manufacture
products for customers and may result in the decline of freight carrier capacity in our geographic markets, or make freight carriers
unavailable. Further, increases in energy or freight costs that cannot be passed on to customers, or changes in costs relative to
energy and freight costs paid by competitors, has adversely affected, and may continue to adversely affect, our profitability.
7
Oil prices are extremely volatile. A substantial or extended decline in the price of oil could adversely affect our financial condition
and results of operations. Prices for oil can fluctuate widely. Our Palmer and Specialty (Houston, Texas) units' revenues are highly
dependent on our customers adding oil well drilling and pumping locations. Should oil prices decline such that drilling becomes
unprofitable for our customers, such customers will likely cap many of their current wells and cease or curtail expansion. This
will decrease the demand for our tanks and pipe and tube and adversely affect the results of our operations.
Significant changes in nickel prices could have an impact on the sales of the Metals Segment. The Metals Segment uses nickel in
a number of its products. Nickel prices are currently at a relatively low level, which reduces our manufacturing costs for certain
products. When nickel prices increase, many of our customers increase their orders in an attempt to avoid future price increases,
resulting in increased sales for the Metals Segment. Conversely, when nickel prices decrease, many of our customers wait to place
orders in an attempt to take advantage of subsequent price decreases, resulting in reduced sales for the Metals Segment. On average,
the Metals Segment turns its inventory of commodity pipe every six months, but the nickel surcharge on sales of commodity pipe
is established on a monthly basis. The difference, if any, between the price of nickel on the date of purchase of the raw material
and the price, as established by the surcharge, on the date of sale has the potential to create an inventory price change gain or loss.
If the price of nickel steadily increases over time the Metals Segment is the beneficiary of the increase in nickel price in the form
of metal price change gains. We will incur inventory price losses in the future if nickel prices decrease. Any material changes in
the cost of nickel could impact our sales and result in fluctuations in the profits of the Metals Segment.
We encounter significant competition in all areas of our businesses and may be unable to compete effectively, which could result
in reduced profitability and loss of market share. We actively compete with companies producing the same or similar products
and, in some instances, with companies producing different products designed for the same uses. We encounter competition from
both domestic and foreign sources in price, delivery, service, performance, product innovation and product recognition and quality,
depending on the product involved. For some of our products, our competitors are larger and have greater financial resources than
we do. As a result, these competitors may be better able to withstand a change in conditions within the industries in which we
operate, a change in the prices of raw materials or a change in the economy as a whole. Our competitors can be expected to continue
to develop and introduce new and enhanced products and more efficient production capabilities, which could cause a decline in
market acceptance of our products. Current and future consolidation among our competitors and customers also may cause a loss
of market share as well as put downward pressure on pricing. Our competitors could cause a reduction in the prices for some of
our products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. If
we cannot compete successfully, our business, financial condition and profitability could be adversely affected.
Our lengthy sales cycle for the Specialty Chemicals Segment makes it difficult to predict quarterly revenue levels and operating
results. Purchasing the products of the Specialty Chemicals Segment is a major commitment on the part of our customers. Before
a potential customer determines to purchase products from the Specialty Chemicals Segment, the Company must produce test
product material so that the potential customer is satisfied that we can manufacture a product to their specifications. The production
of such test materials is a time-consuming process. Accordingly, the sales process for products in the Specialty Chemicals Segment
is a lengthy process that requires a considerable investment of time and resources on our part. As a result, the timing of our revenues
is difficult to predict, and the delay of an order could cause our revenues to fall below our expectations and those of the public
market analysts and investors.
Our operations expose us to the risk of environmental, health and safety liabilities and obligations, which could have a material
adverse effect on our financial condition, results of operations or cash flows. We are subject to numerous federal, state and local
environmental protection and health and safety laws governing, among other things:
•
•
•
•
the generation, use, storage, treatment, transportation, disposal and management of hazardous substances and wastes;
emissions or discharges of pollutants or other substances into the environment;
investigation and remediation of, and damages resulting from, releases of hazardous substances; and
the health and safety of our employees.
Under certain environmental laws, we can be held strictly liable for hazardous substance contamination of any real property we
have ever owned, operated or used as a disposal site. We are also required to maintain various environmental permits and licenses,
many of which require periodic modification and renewal. Our operations entail the risk of violations of those laws and regulations,
and we cannot assure you that we have been or will be at all times in compliance with all of these requirements. In addition, these
requirements and their enforcement may become more stringent in the future.
We have incurred, and expect to continue to incur, additional capital expenditures in addition to ordinary costs to comply with
applicable environmental laws, such as those governing air emissions and wastewater discharges. Our failure to comply with
applicable environmental laws and permit requirements could result in civil and/or criminal fines or penalties, enforcement actions,
and regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures such as the installation of
8
pollution control equipment, which could have a material adverse effect on our financial condition, results of operations or cash
flows.
We are currently, and may in the future be, required to investigate, remediate or otherwise address contamination at our current
or former facilities. Many of our current and former facilities have a history of industrial usage for which additional investigation,
remediation or other obligations could arise in the future and that could materially adversely affect our business, financial condition,
results of operations or cash flows. In addition, we are currently, and could in the future be, responsible for costs to address
contamination identified at any real property we used as a disposal site.
Although we cannot predict the ultimate cost of compliance with any of the requirements described above, the costs could be
material. Non-compliance could subject us to material liabilities, such as government fines, third-party lawsuits or the suspension
of non-compliant operations. We also may be required to make significant site or operational modifications at substantial cost.
Future developments also could restrict or eliminate the use of or require us to make modifications to our products, which could
have a significant negative impact on our results of operations and cash flows. At any given time, we are involved in claims,
litigation, administrative proceedings and investigations of various types involving potential environmental liabilities, including
cleanup costs associated with hazardous waste disposal sites at our facilities. We cannot assure you that the resolution of these
environmental matters will not have a material adverse effect on our results of operations or cash flows. The ultimate costs and
timing of environmental liabilities are difficult to predict. Liability under environmental laws relating to contaminated sites can
be imposed retroactively and on a joint and several basis. We could incur significant costs, including cleanup costs, civil or criminal
fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws.
We could be subject to third party claims for property damage, personal injury, nuisance or otherwise as a result of violations of,
or liabilities under, environmental, health or safety laws in connection with releases of hazardous or other materials at any current
or former facility. We could also be subject to environmental indemnification claims in connection with assets and businesses that
we have acquired or divested.
There can be no assurance that any future capital and operating expenditures to maintain compliance with environmental laws, as
well as costs to address contamination or environmental claims, will not exceed any current estimates or adversely affect our
financial condition and results of operations. In addition, any unanticipated liabilities or obligations arising, for example, out of
discovery of previously unknown conditions or changes in laws or regulations, could have an adverse effect on our business,
financial condition, results of operations or cash flows.
We are dependent upon the continued operation of our production facilities, which are subject to a number of hazards. In both of
our business segments, but especially in the Specialty Chemicals Segment, our production facilities are subject to hazards associated
with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures,
explosions, fires, inclement weather and natural disasters, unscheduled downtime and environmental hazards which could result
in liability for workplace injuries and fatalities. In addition, some of our production capabilities are highly specialized, which
limits our ability to shift production to another facility in the event of an incident at a particular facility. If a production facility,
or a critical portion of a production facility, were temporarily shut down, we likely would incur higher costs for alternate sources
of supply for our products. We cannot assure you that we will not experience these types of incidents in the future or that these
incidents will not result in production delays, failure to timely fulfill customer orders or otherwise have a material adverse effect
on our business, financial condition or results of operations.
Certain of our employees in the Metals Segment are covered by collective bargaining agreements, and the failure to renew these
agreements could result in labor disruptions and increased labor costs. As of December 31, 2019, we had 247 employees
represented by unions at our Bristol, Tennessee, Mineral Ridge, Ohio, and Munhall, Pennsylvania facilities, which is 41 percent
of the aggregate number of Company employees. These employees are represented by three local unions affiliated with the United
Steelworkers (the “Steelworkers Union"). The collective bargaining contracts for the Steelworkers Unions will expire in July 2024
(Bristol, TN), June 2020 (Mineral Ridge, OH), and January 2023 (Munhall, PA). Although we believe that our present labor
relations are strong, our failure to renew these agreements on reasonable terms as the current agreements expire could result in
labor disruptions and increased labor costs, which could adversely affect our financial performance.
9
Our current capital structure includes indebtedness, which is secured by all or substantially all of our assets and which contains
restrictive covenants that may prevent us from obtaining adequate working capital, making acquisitions or capital improvements.
Our existing credit facility contains restrictive covenants that limit our ability to, among other things, borrow money or guarantee
the debts of others, use assets as security in other transactions, make investments or other restricted payments or distributions,
change our business or enter into new lines of business, and sell or acquire assets or merge with or into other companies. In addition,
our credit facility requires us to meet a minimum fixed charge coverage ratio which could limit our ability to plan for or react to
market conditions or meet extraordinary capital needs and could otherwise restrict our financing activities. Our ability to comply
with the covenants and other terms of our credit facility will depend on our future operating performance. If we fail to comply
with such covenants and terms, we will be in default and the maturity of any then outstanding related debt could be accelerated
and become immediately due and payable. In addition, in the event of such a default, our lender may refuse to advance additional
funds, demand immediate repayment of our outstanding indebtedness, and elect to foreclose on our assets that secure the credit
facility.
There were no events of default under our credit facility at December 31, 2019. Although we believe we will remain in compliance
with these covenants in the foreseeable future and that our relationship with our lender is strong, there is no assurance our lender
would consent to an amendment or waiver in the event of noncompliance; or that such consent would not be conditioned upon
the receipt of a cash payment, revised principal payout terms, increased interest rates or restrictions in the expansion of the credit
facility for the foreseeable future, or that our lender would not exercise rights that would be available to them, including, among
other things, demanding payment of outstanding borrowings. In addition, our ability to obtain additional capital or alternative
borrowing arrangements at reasonable rates may be adversely affected. All or any of these adverse events would further limit our
flexibility in planning for, or reacting to, downturns in our business.
We may need new or additional financing in the future to expand our business or refinance existing indebtedness, and our inability
to obtain capital on satisfactory terms or at all may have an adverse impact on our operations and our financial results. If we are
unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment
requirements under our existing credit facility. Our ability to obtain new or additional financing will depend on a variety of factors,
many of which are beyond our control. We may not be able to obtain new or additional financing because we may have substantial
debt, our current receivable and inventory balances do not support additional debt availability or because we may not have sufficient
cash flows to service or repay our existing or future debt. In addition, depending on market conditions and our financial performance,
equity financing may not be available on satisfactory terms or at all. If we are unable to access capital on satisfactory terms and
conditions, this could have an adverse impact on our operations and our financial results.
Our existing property and liability insurance coverages contain exclusions and limitations on coverage. We maintain various
forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. From
time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage,
larger self-insured retentions and deductibles and higher premiums, primarily from the operations of the Specialty Chemicals
Segment. As a result, our existing coverage may not be sufficient to cover any losses we may incur and in the future our insurance
coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase
significantly, either of which could have an adverse effect on our results of operations or cash flows.
We may not be able to make the operational and product changes necessary to continue to be an effective competitor. We must
continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to
continue to be an effective competitor in our business markets. In addition, we must anticipate and respond to changes in industry
standards that affect our products and the needs of our customers. We also must continue to make improvements in our productivity
in order to maintain our competitive position. When we invest in new technologies, processes or production capabilities, we face
risks related to construction delays, cost over-runs and unanticipated technical difficulties.
The success of any new or enhanced products will depend on a number of factors, such as technological innovations, increased
manufacturing and material costs, customer acceptance and the performance and quality of the new or enhanced products. As we
introduce new products or refine existing products, we cannot predict the level of market acceptance or the amount of market
share these new or enhanced products may achieve. Moreover, we may experience delays in the introduction of new or enhanced
products. Any manufacturing delays or problems with new or enhanced product launches will adversely affect our operating results.
In addition, the introduction of new products could result in a decrease in revenues from existing products. Also, we may need
more capital for product development and enhancement than is available to us, which could adversely affect our business, financial
condition or results of operations. We sell our products in industries that are affected by technological changes, new product
introductions and changing industry standards. If we do not respond by developing new products or enhancing existing products
on a timely basis, our products will become obsolete over time and our revenues, cash flows, profitability and competitive position
will suffer.
10
In addition, if we fail to accurately predict future customer needs and preferences, we may invest heavily in the development of
new or enhanced products that do not result in significant sales and revenue. Even if we successfully innovate in the development
of new and enhanced products, we may incur substantial costs in doing so, and our profitability may suffer. Our products must be
kept current to meet the needs of our customers. To remain competitive, we must develop new and innovative products on an on-
going basis. If we fail to make innovations, or the market does not accept our new or enhanced products, our sales and results
could suffer.
Our inability to anticipate and respond to changes in industry standards and the needs of our customers, or to utilize changing
technologies in responding to those changes, could have a material adverse effect on our business and our results of operations.
Our strategy of using acquisitions and dispositions to position our businesses may not always be successful, which may have a
material adverse impact on our financial results and profitability. We have historically utilized acquisitions and dispositions in
an effort to strategically position our businesses and improve our ability to compete. We plan to continue to do this by seeking
specialty niches, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic
fit of our existing business units. We consider acquisitions, joint ventures and other business combination opportunities as well
as possible business unit dispositions. From time-to-time, management holds discussions with management of other companies
to explore such opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change.
Acquisitions, joint ventures and other business combinations involve various inherent risks, such as: assessing accurately the value,
strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the
potential loss of key personnel of an acquired business; significant transaction costs that were not identified during due diligence;
our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction;
impairments of goodwill; and unanticipated changes in business and economic conditions affecting an acquisition or other
transaction. The amount and type of consideration and deal charges paid could have a short-term dilutive effect on the Company's
earnings per share. However, such transactions are anticipated to provide long-term economic benefit to the Company. If acquisition
opportunities are not available or if one or more acquisitions are not successfully integrated into our operations, this could have
a material adverse impact on our financial results and profitability.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could
reduce our competitiveness and have an adverse effect on our business and results of operations. The successful implementation
of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management
team. The loss of key members of our management team could have an adverse effect on our business. Although we have entered
into employment agreements with key members of our management team including Craig C. Bram, President and Chief Executive
Officer, Dennis M. Loughran, Senior Vice President and Chief Financial Officer, Sally M. Cunningham, Vice President of Corporate
Administration, James G. Gibson, General Manager and President of Specialty Chemicals Segment, Steven J. Baroff, President
and General Manager of Specialty, K. Dianne Beck, Vice President of Specialty, Christopher D. Sitka, Vice President of Specialty,
Kevin Van Zandt, Vice President of Bristol Metals-Munhall, Maria Haughton Roberson, President of ASTI, and Rex Haughton,
Vice President-Operations of ASTI, employees may resign from the Company at any time and seek employment elsewhere, subject
to certain non-competition and confidentiality restrictions. Additionally, if we cannot retain our technical personnel or attract
additional experienced technical personnel, our ability to compete could be harmed.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of
such activities could result in delays or eliminate new wells from being started, thus reducing the demand for our fiberglass and
steel storage tanks, pressure vessels and heavy walled pipe and tube. Hydraulic fracturing (“fracking”) is currently an essential
and common practice to extract oil from dense subsurface rock formations and this lower cost extraction method is a significant
driving force behind the surge of oil exploration and drilling in several locations in the United States. However, the Environmental
Protection Agency, U.S. Congress and state legislatures have considered adopting legislation to provide additional regulations and
disclosures surrounding this process. In the event that new legal restrictions surrounding the fracking process are adopted in the
areas in which our customers operate, we may see a dramatic decrease in Palmer's and Specialty - Texas' profitability which could
have an adverse impact on our financial results.
Our allowance for doubtful accounts may not be adequate to cover actual losses. An allowance for doubtful accounts in maintained
for estimated losses resulting from the inability of our customers to make required payments. This allowance may not be adequate
to cover actual losses, and future provisions for losses could materially and adversely affect our operating results. The allowance
for doubtful accounts is based on an evaluation of the outstanding receivables and existing economic conditions. The amount of
future losses is susceptible to changes in economic, operating and other outside forces and conditions, all of which are beyond
our control, and these losses may exceed current estimates. Although management believes that the allowance for doubtful accounts
is adequate to cover current estimated losses, management cannot make assurances that we will not further increase the allowance
for doubtful accounts based on subsequent events and economic conditions. A significant increase in the allowance for doubtful
accounts could adversely affect our earnings.
11
We depend on third parties to distribute certain of our products and because we have no control over such third parties we are
subject to adverse changes in such parties’ operations or interruptions of service, each of which may have an adverse effect on
our operations. We use third parties over which we have only limited control to distribute certain of our products. Our dependency
on these third party distributors has increased as our business has grown. Because we rely on these third parties to provide
distribution services, any change in our ability to access these third party distribution services could have an adverse impact on
our revenues and put us at a competitive disadvantage with our competitors.
Freight costs for products produced in our Palmer facility restrict our sales area for this facility. The freight and other distribution
costs for products sold from our Palmer facility are extremely high. As a result, the market area for these products is restricted,
which limits the geographic market for Palmer’s tanks and the ability to significantly increase revenues derived from sales of
products from the Palmer facility.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex
and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC adopted new requirements for companies that use certain
minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties.
These regulations require companies to conduct annual due diligence and disclose whether or not such minerals originate from
the Democratic Republic of Congo and adjoining countries. Tungsten and tantalum are designated as conflict minerals under the
Dodd-Frank Act. These metals are used to varying degrees in our welding materials and are also present in specialty alloy products.
These new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. In addition,
we could incur additional costs to comply with the disclosure requirements, including costs related to determining the source of
any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently
verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement,
which may harm our reputation. In such event, we may also face difficulties in satisfying customers who could require that all of
the components of our products are conflict mineral-free.
Our inability to sufficiently or completely protect our intellectual property rights could adversely affect our business, prospects,
financial condition and results of operations. Our ability to compete effectively in both of our business segments will depend on
our ability to maintain the proprietary nature of the intellectual property used in our businesses. These intellectual property rights
consist largely of trade-secrets and know-how. We rely on a combination of trade secrets and non-disclosure and other contractual
agreements and technical measures to protect our rights in our intellectual property. We also depend upon confidentiality agreements
with our officers, directors, employees, consultants and subcontractors, as well as collaborative partners, to maintain the proprietary
nature of our intellectual property. These measures may not afford us sufficient or complete protection, and others may independently
develop intellectual property similar to ours, otherwise avoid our confidentiality agreements or produce technology that would
adversely affect our business, prospects, financial condition and results of operations.
Our internal controls over financial reporting could fail to prevent or detect misstatements. Because of its inherent limitations,
internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. Any failure to maintain effective internal controls
or to timely effect any necessary improvement in our internal controls and disclosure controls could, among other things, result
in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, all
of which could have a material adverse effect on our financial condition, results of operations and cash flows.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations. Cyber incidents can result
from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access
to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational
disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability
for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting
customer or investor confidence.
Loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs could adversely
affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet
customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The
loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive
disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw material shortages,
inadequate manufacturing capacity or utilization to meet demand, financial problems, tariffs and other regulations affecting trade
between the U.S. and other countries, labor disputes or weather conditions affecting suppliers' production, transportation disruptions
or other reasons beyond our control.
12
In addition, as a master distributor, we face the risk of key product suppliers changing their relationships with distributors generally,
or Specialty in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices
we must pay for their products relative to other distributors or relative to competing products; the geographic or product line
breadth of distributor authorizations; supplier purchasing incentive or other support programs; or product purchase or stock
expectations.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining
customer demand. Certain of our product and raw material suppliers have historically offered to their customers and distributors,
including us, incentives for purchasing their products. In addition to market or customer account-specific incentives, certain
suppliers pay incentives to the customer or distributor for attaining specific purchase volumes during the program period. In some
cases, in order to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When the demand for
our products declines, we may be less willing to add inventory to take advantage of certain incentive programs, thereby potentially
adversely impacting our profitability.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined. As of
December 31, 2019, we had outstanding bank debt of approximately 75.6 million that was indexed to the London Interbank Offered
Rate (“LIBOR”). On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR
rates by the end of 2021. It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by
which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or
elsewhere. Any such developments may cause LIBOR to perform differently than in the past or cease to exist. In addition, any
other legal or regulatory changes made by the FCA, ICE Benchmark Administration Limited, the European Money Markets
Institute (formerly Euribor-EBF), the European Commission or any other successor governance or oversight body, or future changes
adopted by such body, in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may
result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and
changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to
participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published.
If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be
determined using various alternative methods, any of which may result in interest obligations which are more than or do not
otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in
its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. dollar LIBOR may
make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences
could have a material adverse effect on our financing costs.
Item 1B Unresolved Staff Comments
None.
13
Item 2 Properties
The Company operates the major plants and facilities listed below, all of which are in adequate condition for their current usage.
All facilities throughout the Company are believed to be adequately insured. The buildings are of various types of construction
including brick, steel, concrete, concrete block and sheet metal. All have adequate transportation facilities for both raw materials
and finished products. In September 2016, the Company sold its real estate properties previously owned in Tennessee, South
Carolina, Texas and Ohio to Store Master Funding XII, LLC ("Store Funding") and concurrently leased back these real properties;
see Note 10 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
On February 28, 2017, BRISMET purchased certain stainless steel pipe and tube assets of MUSA in Munhall, PA ("MUSA-
Stainless"). As part of this acquisition, BRISMET entered into a 15-month lease with the sellers for the current manufacturing
facility. The lease was amended to extend the term of the lease to May 31, 2023. On July 1, 2018, BRISMET completed the MUSA-
Galvanized acquisition. In connection with this acquisition, the Company entered into an Amended and Restated Master Lease
Agreement (the “Master Lease”) on June 29, 2018, pursuant to which the Company will lease the Munhall, PA facility, purchased
by Store Funding from MUSA for the remainder of the initial term of 20 years set forth in the Master Lease.
On January 1, 2019, ASTI completed the American Stainless acquisition. In connection with the acquisition, the Company and
Store Funding entered into a second Amended and Restated Master Lease, pursuant to which the Company will lease the properties
purchased by Store Funding from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth
in the Master Lease.
A parcel of land in Mineral Ridge, OH used for inventory storage, the corporate headquarters located in Richmond, VA, and the
former shared service center located in Spartanburg, SC continue to be leased by the Company from other parties.
Location
Munhall, PA
Bristol, TN
Principal Operations
Manufacturing stainless steel pipe
Manufacturing stainless steel pipe
Cleveland, TN
Chemical manufacturing and warehousing facilities
Fountain Inn, SC
Chemical manufacturing and warehousing facilities
Andrews, TX
Manufacturing liquid storage solutions and separation equipment
Troutman, NC
Manufacturing ornamental stainless steel tubing
Statesville, NC
Manufacturing ornamental stainless steel tubing
Houston, TX
Cutting facility and storage yard for heavy walled pipe
Mineral Ridge, OH
Cutting facility and storage yard for heavy walled pipe
Mineral Ridge, OH
Richmond, VA
Spartanburg, SC
Augusta, GA
Storage yard for heavy walled pipe
Corporate headquarters
Former office space for corporate employees and shared service center (1)
None (2)
Building Square Feet
284,000
Land Acres
20.0
275,000
143,000
136,834
122,662
106,657
83,000
29,821
12,000
—
5,911
4,858
—
73.1
18.8
16.9
19.6
26.5
26.8
10.0
12.0
4.6
—
—
46.0
(1) Property leased by Company; office was closed in 2018 and all furniture and equipment have been removed.
(2) Property owned by Company; plant was closed in 2001 and all structures and manufacturing equipment have been removed.
Item 3 Legal Proceedings
For a discussion of legal proceedings, see Note 11 to the Consolidated Financial Statements included in Item 8 of this Form 10-
K.
Item 4 Mine Safety Disclosures
Not applicable.
14
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company had 409 common shareholders of record at March 4, 2020. The Company's common stock trades on the Nasdaq Global
Market under the trading symbol SYNL. The Company's credit agreement restricts the payment of dividends indirectly through a
minimum fixed charge coverage covenant. No dividends were declared or paid in 2019. The Company paid a $0.25 cash dividend
on December 12, 2018 and a $0.13 cash dividend on November 6, 2017. The prices shown below are the high and low sales prices
for the common stock for each full quarterly period in the last two fiscal years as quoted on the NASDAQ Global Market.
Quarter
1st
2nd
3rd
4th
2019
2018
High
Low
High
Low
$
16.80
$
12.45
$
15.50
$
19.65
17.17
16.02
14.00
16.25
11.45
21.35
24.80
23.01
12.11
13.63
19.20
12.60
The information required by Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Source: Russell Investment Group
15
Comparison of 5 Year Cumulative Total Return Graph
12/14
12/15
12/16
12/17
12/18
12/19
Synalloy Corporation
$
100.00
$
40.62
$
64.65
$
79.82
$
100.34
$
Russell 2000
NASDAQ Non-Financial
100.00
100.00
95.59
100.93
115.95
104.49
132.94
135.77
118.30
127.88
78.09
148.49
173.66
This graph and related information shall not be deemed to be “filed” with the Securities and Exchange Commission or “soliciting
material” or subject to Regulation 14A, or the liabilities of Section 18 of the 1934 Act, except to the extent the Company specifically
requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the
Securities Act of 1933 or the 1934 Act.
Unregistered Sales of Equity Securities
Pursuant to the compensation arrangement with directors discussed under Item 12 "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" in this Form 10-K, on May 16, 2019, the Company issued an aggregate of 15,909
shares of restricted stock to non-employee directors in lieu of $304,000 of their annual cash retainer fees. Issuance of these shares
was not registered under the Securities Act of 1933 based on the exemption provided by Section 4(a)(2) thereof because no public
offering was involved.
The Company also issued 146,956 shares of common stock in 2019 to management and key employees that vested pursuant to the
2005 and 2015 Stock Awards Plans. Issuance of these shares was not registered under the Securities Act of 1933 based on the
exemption provided by Section 4(a)(2) thereof because no public offering was involved.
Issuer Purchases of Equity Securities
Neither the Company, nor any affiliated purchaser (as defined in Rule 10b-18(a)(3) of the 1934 Act) on behalf of the Company
repurchased any of the Company's securities during the year ended December 31, 2019.
16
Item 6. Selected Financial Data
The selected financial data presented below should be read in conjunction with Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and our consolidated financial statements (including the related notes thereto)
contained elsewhere in this report.
(Dollar amounts in thousands, except per share data)
2019
2018
2017
2016
2015
Operations
Net sales
Gross profit
Selling, general & administrative expense
Goodwill impairment
Operating (loss) income
Net (loss) income - continuing operations
Net (loss) - discontinued operations
Net (loss) income
Financial Position
Total assets
Working capital
Long-term debt, less current portion
Shareholders' equity
Financial Ratios
Current ratio
Gross profit to net sales
Long-term debt to capital
Return on average assets
Return on average equity
Per Share Data (Loss)/Income) – Diluted)
Net (loss) income - continuing operations
Net (loss) - discontinued operations
Net (loss) income
Dividends declared and paid
Book value
Other Data
Depreciation and amortization
$ 11,064
$
Capital expenditures
Employees at year end
Shareholders of record at year end
Average shares outstanding - diluted
Stock Price
Price range of common stock
High
Low
Close
4,537
606
410
8,983
$
$
19.65
11.45
12.91
17
$ 305,168
$ 280,841
$ 201,148
$ 138,566
$ 175,460
30,773
32,627
—
(1,708)
(3,036)
—
(3,036)
257,197
106,537
71,554
106,511
51,237
27,691
—
21,237
13,097
—
13,097
228,399
130,233
76,405
102,484
28,081
24,875
—
2,057
1,341
—
1,341
16,904
22,673
—
(8,246)
(6,994)
(99)
(7,093)
25,319
21,938
17,158
(13,031)
(10,269)
(1,251)
(11,520)
159,874
138,638
149,043
74,396
25,914
89,700
64,868
8,804
88,593
58,310
23,410
95,154
3.6:1
10 %
41 %
(1)%
(3)%
4.5:1
3.2:1
18%
43%
7%
14%
14%
22%
1%
2%
3.0:1
12 %
9 %
(4)%
(7)%
3.2:1
14 %
20 %
(6)%
(10)%
$
(0.34)
$
1.48
$
0.15
$
—
(0.34)
—
11.86
—
0.15
0.13
10.28
7,738
5,279
533
488
8,728
$
$
(0.81)
(0.01)
(0.82)
—
10.22
6,695
3,044
412
527
8,650
$
(1.18)
(0.14)
(1.32)
0.30
11.02
$
6,634
10,905
411
540
8,710
$
15.30
$
11.70
$
18.49
9.75
13.40
6.42
10.95
6.20
6.88
—
1.48
0.25
11.54
8,775
7,355
607
442
8,878
24.80
12.11
16.59
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the 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. On an on-going basis,
management evaluates its estimates and judgments based on historical experience and on various other factors that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of the Company's consolidated financial statements.
Inventory Adjustments and Reserves
At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or
product lines that are being sold below our cost. This would indicate that an adjustment would be required.
During the years ended December 31, 2019 and December 31, 2018, adjustments of $0.2 million and $0.1 million, respectively,
to inventory cost were required by our storage tank facility as lower demand for oil and gas products caused the net realizable
value to fall below inventory cost for certain tanks.
Stainless steel, both in its raw material (coil or plate) or finished goods (pipe) state is purchased/sold using a base price plus an
additional surcharge which is dependent on current nickel prices. As raw materials are purchased, it is priced to the Company
based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer, approximately three
months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost or net realizable
value ("LCNRV") adjustment is recorded when the Company's inventory cost, based upon a historical nickel price, is greater than
the current selling price of that product due to a reduction in the nickel surcharge. During the years ended December 31, 2019 and
December 31, 2018, no material LCNRV adjustments were required by our Metals Segment.
The Company establishes inventory reserves for:
• Estimated obsolete or unmarketable inventory. As of December 31, 2019 and December 31, 2018, the Company identified
inventory items with no sales or expected sales activity for finished goods or no usage for raw materials for a certain
period of time. For those inventory items that are not currently being marketed and unable to be sold, a reserve was
established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $0.3 million
at December 31, 2019 and December 31, 2018, respectively.
• Estimated quantity losses. The Company performs an annual physical inventory during the fourth quarter each year. For
those facilities that complete their physical inventory before the end of December, a reserve is established for the potential
quantity losses that could occur subsequent to their physical. This reserve is based upon the most recent physical inventory
results. At December 31, 2019 and December 31, 2018, the Company had $0.4 million reserved for expected physical
inventory quantity losses.
Impairment of Long-Lived Assets
The Company continually reviews the recoverability of the carrying value of long-lived assets. Long-lived assets are reviewed
for impairment when events or changes in circumstances, also referred to as "triggering events", indicate that the carrying value
of a long-lived asset or group of assets (the "Assets") may no longer be recoverable. Triggering events include: a significant decline
in the market price of the Assets; a significant adverse change in the operating use or physical condition of the Assets; a significant
adverse change in legal factors or in the business climate impacting the Assets' value, including regulatory issues such as
environmental actions; the generation by the Assets of historical cash flow losses combined with projected future cash flow losses;
or the expectation that the Assets will be sold or disposed of significantly before the end of the useful life of the Assets.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with GAAP.
Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and
intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition.
18
The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred
to the identifiable tangible and intangible assets, if any, acquired and liabilities assumed.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at the
reporting unit level, annually in the fourth quarter and whenever circumstances indicate that the carrying value may not be
recoverable. The evaluation of impairment involves using either a step zero qualitative approach or a quantitative approach, if
required, as outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350.
The step zero approach allows an entity to first assess qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If an entity cannot make this determination, then the quantitative
approach will be followed. The quantitative approach involves a comparison of the fair value of the reporting unit in which the
goodwill is recorded to its carrying amount. If the reporting unit's fair value exceeds its carrying value, no impairment loss is
recognized. However, if the reporting unit's carrying value exceeds its fair value, an impairment charge equal to the difference in
the carrying value of the goodwill and reporting unit's fair value is recorded.
When the quantitative approach is used, in making our determination of fair value of the reporting unit, we rely on the discounted
cash flow method. This method uses projections of cash flows from the reporting unit. This approach requires significant judgments
including the Company's projected net cash flows, the weighted average cost of capital used to discount the cash flows and terminal
value assumptions. We derive these assumptions used in the testing from several sources. Many of these assumptions are derived
from our internal budgets, which would include existing sales data based on current product lines and assumed production levels,
manufacturing costs and product pricing. We believe that our internal forecasts are consistent with those that would be used by a
potential buyer in valuing our reporting units. The Company performed the quantitative analysis during the fourth quarter of 2019
which resulted in no impairment of the goodwill recognized of $1.4 million for the Specialty Chemicals Segment or the goodwill
recognized of $16.2 million for the Metals Segment for the year ended December 31, 2019.
Earn-Out Liabilities
In connection with the American Stainless acquisition on January 1, 2019, the Company is required to make quarterly earn-out
payments to American Stainless for a period of three years following closing. Pursuant to the asset purchase agreement between
ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the
three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated
with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. The
fair value of the contingent consideration was estimated by applying the probability weighted expected return method using
management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are
determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated
Statements of Operations and Comprehensive Income
In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out
payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. The fair
value of the contingent consideration was estimated by applying the probability-weighted expected return method using
management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are
determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated
Statements of Operations and Comprehensive Income.
In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make quarterly earn-out
payments to MUSA for a period of 4 years following closing, based on actual sales levels of stainless steel pipe and tube (outside
diameter of 10 inches or less). The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation
approach using management's estimates of pounds shipped and future price per unit. Changes to the fair value of the earn-out
liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the
Consolidated Statements of Operations and Comprehensive Income.
Liquidity and Capital Resources
The Company had cash flows generated by operating activities during 2019 that totaled $28.6 million; cash flows used in operating
activities in 2018 totaled $21.2 million, a year-over-year increase of $49.9 million. The significant components of those results
are as follows:
• Net loss for 2019 was $3.0 million. Add backs for non-cash items include a) depreciation and amortization expense of
$11.1 million and b) stock-based compensation expense of $2.1 million, while outflows for non-cash items include c)
the earn-out adjustments of $0.7 million, and d) all other non-cash items of $0.8 million. The prior year amount includes
19
net income of $13.1 million, plus add backs for non-cash items of a) depreciation and amortization of $8.8 million, b)
the earn-out adjustment of $1.4 million and c) an unrealized loss on investments in equity securities of $2.6 million.
• Accounts receivable generated $9.7 million of cash from operations during 2019 as days outstanding decreased 10 days
in 2019, decreasing from 52 days at the end of 2018 to 42 days at the end of 2019.
•
Inventory generated $20.0 million of cash from operations as inventory levels decreased in 2019. The year-over-year
decrease was primarily related to efforts to balance inventory with projected business level. Inventory turns decreased
15% from 1.90 turns at December 31, 2018, calculated on a three-month average basis, to 1.62 turns at December 31,
2019.
• Accounts payable used $5.3 million of cash from operations in 2019, excluding the American Stainless acquisition date
payable, as increased levels of business activity, which would normally increase the accounts payable balance, were offset
by a return to a more normalized accounts payable days outstanding of approximately 31 days at December 31, 2019
compared to 57 days at December 31, 2018.
• Other operating assets and liabilities used $4.2 million of cash from operations in 2019.
In 2019, the Company's current assets decreased $20.4 million while current liabilities increased $3.3 million, from the year ended
2018 amounts, which caused working capital for 2019 to decrease by $23.7 million to $106.5 million from the 2018 total of $130.2
million. The current ratio for the year ended December 31, 2019, decreased to 3.6:1compared to the 2018 year-end ratio of 4.5:1.
The Company used cash from investing activities during 2019 of $25.7 million. The American Stainless acquisition during the
first quarter 2019 used $21.9 million and the Company incurred capital asset purchases of $4.5 million. The Company used cash
from financing activities during 2019 of $4.5 million as the Company borrowed funds during 2019 for the aforementioned
acquisition and capital purchases partially offset by repayments of the line of credit.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of its asset-based line of
credit (the "Line") by $20 million to a maximum of $65 million and extended the maturity date. Interest under the Credit Agreement
is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under
the Credit Agreement are limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that
includes eligible accounts receivable and inventory.
On June 29, 2018, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $15 million to a
maximum of $80 million. As a result of the amendment, the interest rate on the Line is now calculated using One Month LIBOR
plus a spread of 1.65 percent. None of the other provisions of the Credit Agreement were changed as a result of this amendment.
On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase the Line from $80
million to $100 million and to create a new 5-year term loan in the principal amount of $20 million (the “Term Loan”). The Term
Loan was used to finance the American Stainless acquisition (see Note 15 to the Consolidated Financial Statements).
The Company determined that each refinancing should be accounted for as a debt modification. The Company incurred lender
and third party costs associated with the debt restructuring that were capitalized on the balance sheet while certain other third party
costs were expensed.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the
stock and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the
real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 10.
Covenants under the amended Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a
minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year. At December 31,
2019, the Company was in compliance with all debt covenants. The Company believes that its current liquidity position is sufficient
to meet its needs going forward.
Results of Operations
Comparison of 2019 to 2018 – Consolidated
For the full-year 2019, net loss totaled $3.0 million, or $0.34 per diluted loss per share. This compared to full-year 2018 net income
of $13.1 million, or $1.48 diluted earnings per share. For the fourth quarter of 2019 the Company recorded a net loss of $0.9
million, or $0.10 diluted loss per share. This compares to net income of $0.5 million, or $0.06 diluted earnings per share for fourth
quarter of 2018.
20
The full-year and fourth quarter of 2019 were positively impacted by mark-to-market valuation gains on investments in equity
securities totaling $1.9 million and $1.7 million, respectively, compared to a valuation losses of $2.6 million for the full year of
2018 and $2.1 million in the fourth quarter of 2018, respectively. The full-year and fourth quarter 2019 operating results include
an operating profit of $3.0 million and $0.7 million, respectively, due to ASTI's operations which were acquired in the first quarter
of 2019. The full-year and fourth quarter 2018 operating results include an operating profit of $65,000 and $96,000, respectively,
due to Munhall-Galvanized's operations which were acquired in the third quarter of 2018.
Full-year 2019 consolidated gross profit decreased 40 percent to $30.8 million, or 10 percent of sales, compared to $51.2 million,
or 18 percent of sales, in 2018. For the fourth quarter of 2019, consolidated gross profit was $7.0 million, a decrease of 32 percent
from the fourth quarter of 2018 of $10.3 million. Consolidated gross profit was 10 percent of sales for the fourth quarter of 2019
and 14 percent of sales for the same period of 2018. The decreases in dollars and in percentage of sales were attributable to the
Metals Segment as discussed in the Metals Segment Comparison of 2019 to 2018 below.
Consolidated selling, general and administrative expense for 2019 increased by $4.9 million to $32.6 million, or 11 percent of
sales, compared to $27.7 million, or 10 percent of sales for 2018. These costs increased $0.4 million during the fourth quarter of
2019 to $7.7 million compared to $7.3 million for the same period of 2018 and were 11 percent of sales for the fourth quarter of
2019 compared to 10 percent of sales for the fourth quarter of 2018. The most significant dollar increase for both the full year and
fourth quarter of 2019 when compared to the same periods of 2018 resulted from higher personnel costs due to annual merit
increases and growth-related staffing increases ($1.6 million higher for the full year and $0.4 million higher for the fourth quarter);
an increase in stock compensation expense related to the vesting of shares under the Company's Long-Term Incentive Program
($1.3 million higher for the full year and $0.1 million higher for the fourth quarter); and an increase in amortization expense ($1.1
million higher for the full year and $0.3 million higher for the fourth quarter). The inclusion of ASTI's selling, general and
administrative expenses added $4.0 million for the year and $0.9 million for the fourth quarter. Because the American Stainless
acquisition occurred in January of 2019, none of ASTI's selling, general, and administrative expenses were included in the prior
year. The remainder of the increase for the year resulted primarily from:
•
Sales commissions related to higher sales ($0.7 million higher for the full year and $40,000 higher for the fourth
quarter)
• Higher professional fees related to work performed for the American Stainless acquisition ($0.5 million higher for
the full year);
In addition, the Company incurred $1.9 million for one-time acquisition costs associated with the 2019 American Stainless
acquisition, compared to $1.2 million of acquisition costs in 2018. These costs were $0.2 million and $0.3 million for the fourth
quarters of 2019 and 2018, respectively. These items are discussed in greater detail in the respective sections below.
Comparison of 2018 to 2017 – Consolidated
For the full-year 2018, net income totaled $13.1 million, or $1.48 per diluted earnings per share. This compared to full-year 2017
net income of $1.3 million, or $0.15 diluted earnings per share. For the fourth quarter of 2018 the Company recorded net income
of $0.5 million, or $0.06 diluted earnings per share. This compares to net income of $1.0 million, or $0.11 diluted earnings per
share for fourth quarter of 2017.
The full-year and fourth quarter of 2018 were negatively impacted by mark-to-market valuation losses on investments in equity
securities totaling $2.6 million and $2.1 million, respectively, compared to a valuation gain of $0.3 million for the full year of
2017 and no such gain or loss in the fourth quarter of 2017. The full-year and fourth quarter 2018 operating results include an
operating profit of $65,000 and $96,000, respectively, due to Munhall-Galvanized's operations which were acquired in the third
quarter 2018.
Full-year 2018 consolidated gross profit increased 82 percent to $51.2 million, or 18 percent of sales, compared to $28.1 million,
or 14 percent of sales, in 2017. For the fourth quarter of 2018, consolidated gross profit was $10.3 million, an increase of 34
percent from the fourth quarter of 2017 of $7.7 million. Consolidated gross profit was 14 percent of sales for the fourth quarter
of 2018 and 15 percent of sales for same period of 2017. The increases in dollars and in percentage of sales were attributable to
the Metals Segment as discussed in the Metals Segment Comparison of 2018 to 2017 below.
Consolidated selling, general and administrative expense for 2018 increased by $2.8 million to $27.7 million, or 10 percent of
sales, compared to $24.9 million, or 12 percent of sales for 2017. These costs increased $1.3 million during the fourth quarter of
2018 to $7.3 million compared to $6.0 million for the same period of 2017 and were 10 percent of sales for the fourth quarter of
2018 compared to 11 percent of sales for the fourth quarter of 2017. The most significant dollar increase for both the full year and
fourth quarter of 2018 when compared to the same periods of 2017 resulted from higher incentive based bonuses, increases of
$2.0 million and $0.5 million, respectively. The inclusion of Munhall-Galvanized's selling, general and administrative expenses
for the second half and fourth quarter of 2018, added $0.3 million and $0.2 million, respectively. Because the MUSA-Galvanized
21
acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general, and administrative expenses were included
in the prior year. The Company also incurred lower lease expense of $0.4 million related to the inclusion of the Munhall facility
into the Master Lease with Store Funding (see Note 10 to the Consolidated Financial Statements). The remainder of the increase
for the year resulted primarily from:
• Higher personnel costs due to annual merit increases and growth-related staffing increases ($0.8 million higher for
the full year and $0.3 million higher for the fourth quarter);
•
Sales commissions related to higher sales ($0.2 million higher for the full year and $0.2 million higher for the fourth
quarter)
In addition, the Company incurred $1.2 million for one-time acquisition costs associated with the 2018 MUSA-Galvanized
acquisition and 2019 American Stainless acquisition, compared to $0.8 million of acquisition costs in 2017. These costs were $0.3
million and $13,000 for the fourth quarters of 2018 and 2017, respectively. These items will be discussed in greater detail in the
respective sections below.
Metals Segment
The following table summarizes operating results from continuing operations for the three years indicated. Reference should be
made to Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
(in thousands)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense
(Gain) loss on sale-leaseback
Operating income (loss)
2019
2018
2017
Amount
%
Amount
%
Amount
%
$
251,078
100.0 % $
222,242
100.0 % $
152,957
100.0 %
226,852
90.4 %
178,766
24,226
20,534
—
3,692
$
9.6 %
8.2 %
— %
1.5% $
43,476
15,932
(240)
27,784
80.4 %
19.6 %
7.2 %
(0.1)%
12.5 % $
133,452
19,505
14,080
(240)
5,664
87.2 %
12.8 %
9.2 %
(0.2)%
3.7 %
Comparison of 2019 to 2018 - Metals Segment
The Metals Segment's net sales totaled $251.1 million for the full year of 2019, an increase of 13 percent compared to the same
period of 2018. Net sales for the fourth quarter of 2019 totaled $55.4 million, a decrease of seven percent compared to the fourth
quarter 2018 net sales of $59.4 million. Excluding net sales for ASTI (for the twelve months ended December 31, 2019) and
Munhall-Galvanized (for the first six months of 2019), full-year 2019 sales decreased eight percent compared to the same period
of 2018 and fourth quarter 2019 sales decreased 20 percent compared to the same period for 2018, primarily related to a 60%
decline in storage tank and vessel sales, loss of value added Heavy Wall volume due to the disclosed outage starting in May 2019,
as well as nickel and alloy related pricing declines compared to prior year.
Welded Pipe & Tube Operations net sales from continuing operations increased 21 percent and two percent for the full-year and
fourth quarter of 2019, respectively, when compared to the same periods of the prior year. Excluding ASTI (for the twelve months
ended December 31, 2019) and Munhall-Galvanized (for the first six months of 2019), net sales would have decreased nine percent
and 16 percent for the full year and fourth quarter of 2019, respectively. The total sales increase for the year resulted from a 49
percent increase in unit volumes partially offset by a 18 percent decrease in average selling price. For the fourth quarter, unit
volumes increased 17 percent while the average selling price decreased 12 percent for 2019 compared to 2018. The lower average
selling price for the full-year was significantly impacted by the incremental sales of Munhall-Galvanized, as sales of that more
commodity galvanized pipe and tube had an unfavorable effect on average selling prices. Excluding the impact of Munhall-
Galvanized, the average selling price of stainless steel pipe and tube decreased 5 percent for the full year of 2019 compared to the
full year of 2018, primarily due to declines in nickel and other alloy related surcharges that impacted realized sales prices.
Seamless heavy-wall carbon steel pipe and tube sales decreased six percent and five percent for the full-year and fourth quarter,
respectively, of 2019 compared to the same periods of 2018. The full year sales decrease was comprised of a three percent decrease
in unit volumes combined with a three percent decrease in average selling price. For the fourth quarter, unit volumes increased
seven percent while average selling prices decreased 11 percent. Lower pricing was primarily due to product mix and lessening
impact of tariff pricing supports in the market, but was also impacted by the overhang of excessive distributor inventories, slowing
market demand and reduced mill pricing.
Storage tank sales decreased nine percent and 60 percent for the full-year and fourth quarter, respectively, of 2019 when compared
to the same periods for the prior year. The full-year decrease was comprised of a 22.5 percent increase in the average selling price,
22
offset by a 25 percent decline in the number of tanks sold. As of December 31, 2019, backlog for storage tanks totaled $5.8 million,
a decrease of 72 percent over levels as of December 31, 2018. For the fourth quarter, the storage tank sales decrease resulted from
a 59 percent decrease in the number of tanks sold combined with a 3.5 percent increase in average selling price. The decrease in
both sales levels and backlog is attributable to a significant retrenchment in completion of wells in the Permian Basin during the
fourth quarter, as well as stagnant oil prices that are down 20.1 percent from early in the fourth quarter of 2018 and have seen no
significant rebound in 2019.
The Metals Segment's operating income decreased $24.1 million to $3.7 million for the full-year 2019 compared to operating
income of $27.8 million for 2018. Fourth quarter 2019 operating income decreased $4.1 million to $0.6 million compared to
operating income of $4.7 million for the fourth quarter of 2018. Current year operating results were affected by the following
factors:
• The addition of ASTI operations as noted above. The full-year 2019 and fourth quarter of 2019 operating results
includes $3.0 million and $0.7 million, respectively, for ASTI operations. These amounts do not reflect the earn-out
adjustment for the year since that expense is not included in the Metals Segment's operating results.
• Nickel prices and resulting surcharges for 304 and 316 alloys experienced significant increases and decreases during
2019, with the net result being significant margin reduction as inventories bought at higher surcharge levels were
sold during declining pricing periods. As a result, the full year of 2019 generated a net unfavorable operating impact
of $6.4 million related to metal pricing, compared to a period of significantly more favorable indexed nickel prices
overall in 2018, which generated metal pricing gains of $5.0 million.
• Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for
a $13.4 million decline in operating profit margins in 2019 compared to 2018.
• Operating income from seamless carbon pipe and tube showed a decline of $2.4 million related to lower volume and
pricing noted above.
Selling, general and administrative expense increased $4.6 million, or 29 percent, for the full-year 2019 when compared to 2018.
This expense category was 8 percent of sales for 2019 and 7 percent of sales for 2018. For the fourth quarter, selling, general and
administrative expense was $5.1 million (9 percent of sales) in 2019, an increase of $1.0 million from $4.1 million (7 percent of
sales) for the same period of 2018. The dollar increase for both the year and fourth quarter of 2019 when compared to the same
periods of 2018 were impacted by the inclusion of ASTI's selling, general and administrative expenses. Because the American
Stainless acquisition occurred in January of 2019, none of ASTI's selling, general and administrative expenses were included in
the prior year. This accounted for $4.0 million and $0.9 million of the full-year and fourth quarter increase in selling, general and
administrative costs for 2019. The remaining changes in selling, general and administrative expense resulted from:
• Allocated administrative costs (higher by $1.3 million and $0.2 million for the full-year and fourth quarter,
respectively);
• Lower incentive bonus expense on a full-year basis by $1.2 million;
• Compensation expenses primarily related to merit increases (higher by $0.2 million on a full-year basis); and
• Lower amortization expense (lower by $60,000 and $25,000 for the full-year and fourth quarter, respectively)
Comparison of 2018 to 2017 - Metals Segment
The Metals Segment's net sales totaled $222.2 million for the full year of 2018, an increase of 45 percent compared to the same
period of 2017. Net sales for the fourth quarter of 2018 totaled $59.4 million, an increase of 44 percent compared to the fourth
quarter 2017 net sales of $41.1 million. Excluding Munhall-Galvanized, acquired in the third quarter of 2018, full-year 2018 sales
increased 38 percent compared to the same period of 2017 and fourth quarter 2018 sales were 31 percent greater than the same
period for 2017.
Stainless and galvanized steel pipe net sales from continuing operations increased 58 percent and 61 percent for the full-year and
fourth quarter of 2018, respectively, when compared to the same periods of the prior year. Excluding Munhall-Galvanized, net
sales would have increased 46 percent and 41 percent for the full year and fourth quarter of 2018, respectively. The total sales
increase for the year resulted from a 60 percent increase in unit volumes partially offset by a two percent decrease in average
selling price. For the fourth quarter, unit volumes increased 72 percent while the average selling price decreased six percent for
2018 compared to 2017. The lower average selling price for the full-year and fourth quarter resulted from the incremental sales
of Munhall-Galvanized, as their sales of more commodity galvanized pipe and tube had an unfavorable effect on average selling
23
prices. Excluding the impact of Munhall-Galvanized, the average selling price of stainless steel pipe and tube increased 19 percent
and 29 percent for the full year and fourth quarter of 2018, respectively, compared to the same periods of 2017.
Seamless heavy-wall carbon steel pipe and tube sales increased 29 percent and 23 percent for the full-year and fourth quarter,
respectively, of 2018 compared to the same periods of 2017. The full year sales increase was comprised of a six percent increase
in unit volumes combined with a 21 percent increase in average selling price. For the fourth quarter, unit volumes decreased four
percent while average selling prices increased 26 percent. Heavier demand in 2018, primarily related to stable demand in the oil
and gas sector, improvements in demand in the general industrial sector, as well as tariff induced price increases, drove the sales
increase.
Storage tank sales increased 15 percent and two percent for the full-year and fourth quarter, respectively, of 2018 when compared
to the same periods for the prior year. The full-year increase was comprised of a 25 percent increase in the average selling price,
offset by a 15 percent decline in the number of tanks sold. With a significant portion of the average price increase related to an
increase in both size and complexity of tanks being purchased, the decline in units sold relates primarily to throughput capabilities
rather than any decline in overall demand. As of December 31, 2018, backlog for storage tanks totaled $20.7 million, an improvement
of 20 percent over levels as of December 31, 2017. For the fourth quarter, the storage tank sales increase resulted from a 28 percent
decrease in the number of tanks sold combined with a 44 percent increase in average selling price. The results highlight strong
demand and activity in the Permian Basis and other Palmer delivery areas, even as West Texas Intermediate ("WTI") pricing and
other economic indicators have shown some variability during 2018.
The Metals Segment's operating income increased $22.1 million to $27.8 million for the full-year 2018 compared to operating
income of $5.7 million for 2017. Fourth quarter 2018 operating income increased $1.7 million to $4.7 million compared to operating
income of $3.0 million for the fourth quarter of 2017. Current year operating results were affected by the following factors:
• The addition of Munhall-Galvanized operations as noted above. The full-year 2018 and fourth quarter of 2018
operating results includes $65,000 and $95,000, respectively, for Munhall-Galvanized operations. These amounts
do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating
results.
• Nickel prices and resulting surcharges for 304 and 316 alloys ended the fourth quarter of 2018 lower than the previous
quarter, with surcharges for both alloys decreasing by $0.11 and $0.13 per pound, respectively; average nickel prices
for the quarter generated a net unfavorable operating impact of $0.2 million related to metal pricing, compared to
an unfavorable net impact of $1.0 million for the fourth quarter of 2017. The current quarter’s metal price change
loss brought the full year metal price change gain to $5.0 million, compared to the full year 2017 metal price change
loss of $2.6 million.
• Year over year changes in volume, pricing and product mix, as noted above, combined for a 53 percent improvement
in gross profit margins in 2018 compared to 2017.
• Operating income from seamless carbon pipe and tube showed a significant 246 percent improvement over the prior
year.
Selling, general and administrative expense increased $1.9 million, or 13 percent, for the full-year 2018 when compared to 2017.
This expense category was seven percent of sales for 2018 and nine percent of sales for 2017. For the fourth quarter, selling,
general and administrative expense was $4.1 million (seven percent of sales) in 2018, an increase of $0.7 million from $3.4 million
(eight percent of sales) for the same period of 2017. The dollar increase for both the year and fourth quarter of 2018 when compared
to the same periods of 2017 were impacted by the inclusion of Munhall-Galvanized's selling, general and administrative expenses.
Because the MUSA-Galvanized acquisition occurred in July of 2018, none of Munhall-Galvanized's selling, general and
administrative expenses were included in the prior year. This accounted for $0.3 million and $0.2 million of the full-year and
fourth quarter increase in selling, general and administrative costs for 2018. The remaining changes in selling, general and
administrative expense resulted from:
• Higher incentive bonus expense ($1.2 million higher and $0.2 million higher for the full-year and fourth quarter,
respectively);
• Lower lease expenses related to the inclusion of the Munhall facility into the Master Lease with Store Funding ($0.4
million lower for the full year - see Note 10 to the Consolidated Financial Statements);
• Allocated administrative costs (higher by $0.4 million and $96,000 for the full-year and fourth quarter, respectively);
24
• Compensation expenses primarily related to merit increases and higher direct sales headcount (higher by $0.7 million
and $0.3 million for the full-year and fourth quarter, respectively), which were offset by lower commissions on a
full year basis by $0.3 million;
• Higher travel costs (higher by $0.2 million and $67,000 for the full-year and fourth quarter, respectively);
• Higher bad debt expense (higher by $0.2 million and $0.2 million for full-year and fourth quarter, respectively); and
• Lower amortization expense (lower by $63,000 and $10,000 for the full-year and fourth quarter, respectively)
Specialty Chemicals Segment
The following tables summarize operating results for the three years indicated. Reference should be made to Note 13 to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
(in thousands)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expense
(Gain) loss on sale-leaseback
Operating income
2019
2018
2017
Amount
%
Amount
%
Amount
%
$
$
54,090
46,983
7,107
4,296
—
2,811
100.0 % $
86.9 %
13.1 %
7.9 %
— %
5.2% $
58,599
50,393
8,206
4,327
(95)
3,974
100.0 % $
86.0 %
14.0 %
7.4 %
(0.2)%
6.8 % $
48,191
39,217
8,974
4,679
(95)
4,390
100.0 %
81.4 %
18.6 %
9.7 %
(0.2)%
9.1 %
Comparison of 2019 to 2018 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment decreased by 8 percent, or $4.5 million, to $54.1 million for 2019 compared to $58.6
million in 2018. For the fourth quarter of 2019, sales were $12.6 million, representing a 5.5 percent decrease from $13.3 million
for the same quarter of 2018. For the full year, overall shipped pounds were up three percent on stable volume for contract
manufactured products and an eight percent increase in tolled products. For the fourth quarter of 2019, pounds shipped decreased
four percent. Overall selling prices decreased 10 percent and one percent for the full-year and fourth quarter, respectively, of 2019
compared to the same periods of 2018. Net sales were unfavorably impacted during the full year of 2019 from non-repeat of $2.4
million in opportunistic 2018 asphalt related sales, lower pass-through pricing on lower cost raw materials of $0.8 million, lower
conversion revenue of approximately $0.6 million on higher levels of tolled versus full priced product sales, and $0.7 million in
lower fourth quarter 2019 sales related to retrenchment in purchases to manage year-end working capital.
The Specialty Chemicals Segment's operating income for the full-year of 2019 decreased 29 percent to $2.8 million. The fourth
quarter of 2019 decreased 35 percent from the prior year quarter to $0.4 million. During 2019, gross profit margin held relatively
steady to previous 2018 levels, at 13 percent versus 14 percent, respectively. Lower profit in 2019 is primarily related to lost
contribution of approximately $0.9 million on lost asphalt and other sales noted above, as well as a $0.3 million benefit in 2018
from a legal claim settlement that did not repeat in 2019.
Selling, general and administrative expense decreased $30,584 or 0.7 percent, to $4.30 million in 2019 when compared to 2018
expense of $4.33 million, which represented 8 percent of sales and 7 percent of sales, respectively. For the fourth quarter, selling,
general and administrative expense was $1.0 million (8 percent of sales) in 2019, a decrease of $0.1 million when compared to
$1.1 million (8 percent of sales) for the same period of 2018.
The full-year decreases in selling, general and administrative expenses resulted from:
• Lower sales commissions ($0.3 million and $0.1 million lower for the full-year and fourth quarter, respectively);
• Lower incentive based bonuses ($0.1 million and $38,500 lower for the full-year and fourth quarter, respectively);
The full-year decreases were offset by:
• Higher wages and benefits ($62,000 and $13,000 higher for the full-year and fourth quarter, respectively); and
• Higher professional fees and allocated expenses ($0.3 million and $56,000 higher for the full-year and fourth quarter,
respectively).
25
Comparison of 2018 to 2017 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment increased by 22 percent or $10.4 million to $58.6 million for 2018 compared to $48.2
million in 2017. For the fourth quarter of 2018, sales were $13.3 million, representing a 14 percent increase from $11.7 million
for the same quarter of 2017. Pounds shipped during the full-year decreased by one percent for 2018 compared to 2017. For the
fourth quarter of 2018, pounds shipped increased eight percent. Overall selling prices increased 23 percent and six percent for the
full-year and fourth quarter, respectively, of 2018 compared to the same periods of 2017. Net sales were favorably impacted during
the full year and fourth quarter of 2018 from the initial ramp up of seven significant customers, a new fire retardant and new
asphalt additive customers at our subsidiary, CRI Tolling (a one-time sourcing not planned to repeat in 2019), two new oil and
gas customers and two new pulp/paper customers at our subsidiary, MC, and a new product launch from an existing customer at
MC.
The Specialty Chemicals Segment's operating income for the full-year of 2018 decreased nine percent to $4.0 million. The fourth
quarter of 2018 increased 10 percent from the prior year quarter to $0.6 million. While the fourth quarter showed modest
improvement, the full second-half 2018 operating income results outperformed the prior year second-half by $0.3 million, or 15
percent. During the second half of 2018, margins were realigned as new higher margin products were added to the portfolio.
However, that strong second-half performance could not overcome a first-half shortfall of $0.7 million, or 26 percent, compared
to the prior year , yielding a net decline on both a dollar basis and operating margin percent basis for the full-year.
Selling, general and administrative expense decreased $0.4 million or seven percent, to $4.3 million in 2018 when compared to
2017 expense of $4.7 million, which represented seven percent of sales and ten percent of sales, respectively. For the fourth quarter,
selling, general and administrative expense was $1.1 million (eight percent of sales) in 2018, an increase of $0.2 million when
compared to $0.9 million (seven percent of sales) for the same period of 2017.
The full-year decreases in selling, general and administrative expenses resulted from:
• Lower wages and benefits in 2018 ($0.2 million and $38,000 lower for the full-year and fourth quarter, respectively);
• Lower professional fees and allocated expenses ($0.4 million and $0.1 million lower for the full-year and fourth
quarter, respectively);
• Lower bad debt expenses ($0.2 million and $15,000 lower for the full-year and fourth quarter, respectively); and
• A $0.3 million gain related to a legal settlement in 2018;
The full-year decreases were offset by:
• Higher sales commissions ($0.5 million and $0.2 million higher for the full-year and fourth quarter, respectively);
and
• Higher incentive based bonuses ($0.3 million and $0.2 million higher for the full-year and fourth quarter, respectively).
Comparison of 2019 to 2018 - Corporate
Corporate expenses increased $0.5 million to $8.4 million, or three percent of sales, in 2019 up from $7.9 million, three percent
of sales, in 2018. The full-year increase resulted primarily from:
• Three year Long-Term Incentive Plan performance shares were accrued in the current year, at a cost of $0.7 million;
•
Professional fees increased by $0.5 million from the prior year resulting from higher audit and banking fees in the
current year;
The full-year increases were partially offset by:
• Lower unallocated acquisition costs of $0.7 million related to the American Stainless acquisition, which transaction
closed on January 1, 2019.
Interest expense was $3.8 million and $2.2 million for the full-years of 2019 and 2018, respectively. The increase was primarily
related to higher average debt outstanding in the full year of 2019, as additional borrowings were primarily related to funds
borrowed related to the January 1 American Stainless acquisition, offset during the year by almost $17 million in net inventory
and other working capital reductions.
Comparison of 2018 to 2017 - Corporate
Corporate expenses increased $1.4 million to $7.9 million, or three percent of sales, in 2018 up from $6.5 million, three percent
of sales, in 2017. The full-year increase resulted primarily from:
26
•
Performance based bonuses increased $0.5 million from the prior year. Pre-defined Adjusted EBITDA targets were
achieved in both 2018 and 2017;
• Acquisition costs increased $0.4 million from the prior year due to the MUSA-Galvanized acquisition in the third
quarter of 2018 (see Note 15 to the Consolidated Financial Statements), as well as fourth quarter costs incurred due
to the American Stainless acquisition, which transaction closed on January 1, 2019 (see Note 15 to the Consolidated
Financial Statements); and
•
Personnel costs were $0.3 million higher as a result of normal annual rate increases;
Interest expense was $2.2 million and $1.0 million for the full-years of 2018 and 2017, respectively. The increase was primarily
related to higher average debt outstanding in the fourth quarter and full year of 2018, as additional borrowings were primarily
related to acquisitions and to support working capital requirements associated with increased business activity.
Contractual Obligations and Other Commitments:
As of December 31, 2019, the Company's contractual obligations and other commitments were as follows:
(in thousands)
Obligations:
Total
2020
2021
2022
2023
2024
Thereafter
Payment Obligations for the Year Ended
Revolving credit facility
$
59,221
$
— $
59,221
$
— $
— $
— $
Term loans
Interest on bank debt
Finance lease
Operating leases
16,333
7,775
603
66,622
4,000
3,798
275
3,562
4,000
3,651
316
3,635
4,000
234
12
3,673
4,000
86
—
333
6
—
3,563
3,635
Total
$ 150,554
$
11,635
$
70,823
$
7,919
$
7,649
$
3,974
$
—
—
—
—
48,554
48,554
Current Conditions and Outlook
The Company has limited visibility on the direction of the manufacturing economy in 2020. Trade with China remains an issue
as does the outcome of the Presidential election. Capital spending is under pressure, particularly in the energy markets. We do not
expect a recession in 2020, but we do anticipate a period of flat to softening demand across our more industrial focused markets.
With this backdrop, over the last 60 days of 2019, we initiated a cost cutting program across the entire Company. In addition to
the work done at our vessel storage business in the fourth quarter, the Company implemented over $6 million in annual cost
savings, which will be fully realized in 2020. The cost reductions cover everything from personnel, raw materials, other
manufacturing costs and professional services.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from adverse changes in interest rates and nickel prices.
Changes in United States interest rates affect the interest earned on the Company's cash and cash equivalents as well as interest
paid on its indebtedness. Except as described below, the Company does not engage in speculative or leveraged transactions, nor
does it hold or issue financial instruments for trading purposes. The Company is exposed to changes in interest rates primarily as
a result of its borrowing activities used to maintain liquidity and fund business operations.
Fair value of the Company's debt obligations at December 31, 2019, which approximated the recorded value, consisted of:
• $59.2 million under a revolving line of credit with an availability of $13.4 million, expiring on December 20, 2021
with a variable interest rate of 3.50 percent.
• $16.3 million under a term loan, expiring January 1, 2024 with a variable interest rate of 3.69 percent.
• An interest rate swap contract with a notional amount of $6.0 million which fixes the term loan interest rate at 3.74
percent. The fair value of the interest rate swap contract was an asset to the Company of $6,088.
The Company occasionally hedges its nickel exposure to provide coverage against extreme downside product pricing exposure
related to the content of nickel alloy contained in purchased stainless steel inventory. The sales price of stainless steel product
27
(containing nickel alloy) is subject to a variable pricing component for alloys (nickel, chrome, molybdenum and iron) contained
in the product. At December 31, 2019, the Company had no such hedge contracts in place.
28
Management's Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. Management has excluded the ASTI facilities operations (acquired in the American Stainless acquisition) from
its assessment of internal control over financial reporting as of December 31, 2019 because this material acquisition closed in the
first quarter of 2019. Total assets of $26.8 million and total revenue of $34.5 million associated with the ASTI facility represent
approximately 14 percent of the related financial statement amounts of the Metals Segment as of, and for the year ended, December
31, 2019.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of
December 31, 2019 using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission
in the Internal Control-Integrated Framework (COSO 2013). Based on that evaluation, management believes the Company's
internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2019, has been audited by KPMG
LLP, an independent registered public accounting firm, which also audited the Company's Consolidated Financial Statements for
the year ended December 31, 2019. KPMG LLP's report on the Company's internal control over financial reporting is set forth
below.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company believes that its disclosure controls and procedures were operating effectively as of December 31, 2019.
29
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Synalloy Corporation and subsidiaries (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive (loss) income, shareholders’
equity, and cash flows for each of the years in the three year period ended December 31, 2019, and the related notes and financial
statement Schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results
of its operations and its cash flows for each of the years in the three year period ended December 31, 2019, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 6, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases
effective January 1, 2019, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification
Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond Virginia
March 6, 2020
30
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Synalloy Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated
statements of operations and comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-
year period ended December 31, 2019, and the related notes and financial statement Schedule II (collectively, the consolidated
financial statements), and our report dated March 6, 2020 expressed an unqualified opinion on those consolidated financial
statements.
The Company acquired American Stainless Tubing, Inc. (American Stainless) during 2019, and management excluded from its
assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, American
Stainless' internal control over financial reporting associated with total assets of $26.8 million and total revenues of $34.5 million
included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of
internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting
of American Stainless.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
31
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Richmond, Virginia
March 6, 2020
32
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements
Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2019, 2018
and 2017
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
34
35
36
37
38
33
SYNALLOY CORPORATION
Consolidated Balance Sheets
As of December 31, 2019 and 2018
(in thousands, except par value and share data)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Raw materials
Work-in-process
Finished goods
Total inventories, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Right-of-use assets, operating leases, net
Goodwill
Intangible assets, net
Deferred charges, net and other non-current assets
Total assets
Liabilities and Shareholders' equity
Current liabilities
Accounts payable
Accrued expenses
Current portion of long-term debt
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Total current liabilities
Long-term debt
Long-term portion of earn-out liability
Long-term portion of operating lease liabilities
Long-term portion of finance lease liabilities
Long-term deferred sale-leaseback gain
Deferred income taxes
Other long-term liabilities
Shareholders' equity
Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Less cost of common stock in treasury - 1,257,784 and 1,424,279 shares, respectively
Total shareholders' equity
Commitments and contingencies – see Note 11
$
$
$
2019
2018
$
626
35,074
42,643
17,354
38,189
98,186
13,229
147,115
40,690
35,772
17,558
15,714
348
2,220
41,065
59,779
21,034
33,389
114,202
9,983
167,470
40,925
—
9,800
9,696
508
257,197
$
228,399
$
21,150
11,613
4,000
3,562
253
40,578
71,554
3,578
33,723
336
—
790
127
10,300
37,407
70,552
—
118,259
11,748
106,511
25,074
12,163
—
—
—
37,237
76,405
4,704
—
—
5,599
253
1,717
10,300
36,521
68,965
—
115,786
13,302
102,484
Total liabilities and shareholders' equity
$
257,197
$
228,399
See accompanying notes to consolidated financial statements.
34
SYNALLOY CORPORATION
Consolidated Statements of Operations and Comprehensive (Loss) Income
For the years ended December 31, 2019, 2018, and 2017
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Acquisition related costs
Earn-out adjustments
Gain on sale-leaseback
Operating (loss) income
Other (income) and expense
Interest expense
Change in fair value of interest rate swap
Other, net
(Loss) Income before income taxes
(Benefit from) provision for income taxes
Net (loss) income
Other comprehensive (loss) income, net of tax:
Unrealized gains on available for sale securities, net
Reclassification adjustment for gains included in net income, net
Comprehensive (loss) income
Net (loss) income per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
2019
2018
2017
$
305,168
$
280,841
$
201,148
274,395
229,604
173,067
30,773
51,237
28,081
32,627
601
(747)
—
(1,708)
3,818
141
(1,904)
(3,763)
(727)
(3,036)
—
—
27,691
1,212
1,431
(334)
21,237
2,211
(20)
2,573
16,473
3,376
13,097
—
—
$
$
$
(3,036) $
13,097
$
(0.34) $
(0.34) $
1.49
1.48
$
$
8,983
8,983
8,806
8,878
24,875
795
688
(334)
2,057
985
(96)
(310)
1,478
137
1,341
355
(366)
1,330
0.15
0.15
8,705
8,728
35
SYNALLOY CORPORATION
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2019, 2018 and 2017
(in thousands, except share and per share data)
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Cost of
Common Stock
in Treasury
Total
Balance at December 31, 2016
$
10,300
$
34,714
$
57,937
$
— $
(14,358) $
88,593
Net income
Other comprehensive loss
Payment of dividends, $0.13 per share
Stock options exercised for 5,389 shares, net
Issuance of 58,532 shares of common stock from the treasury
Stock-based compensation expense
Balance at December 31, 2017
Net income
Cumulative adjustment due to adoption of ASU 2016-01
Payment of dividends, $0.25 per share
Issuance of 66,632 shares of common stock from the treasury
Stock options exercised for 31,488 shares, net
Stock-based compensation expense
Issuance of 44,378 shares in connection with at-the-market offering
—
—
—
—
—
—
—
—
—
68
(227)
638
1,341
—
(1,149)
—
—
—
—
(11)
—
—
—
—
—
—
—
(68)
515
—
1,341
(11)
(1,149)
—
288
638
$
10,300
$
35,193
$
58,129
$
(11) $
(13,911) $
89,700
—
—
—
—
—
—
—
—
—
—
(317)
247
827
571
13,097
(11)
(2,250)
—
—
—
—
—
11
—
—
—
—
—
—
—
—
593
(396)
—
412
13,097
—
(2,250)
276
(149)
827
983
Balance at December 31, 2018
$
10,300
$
36,521
$
68,965
$
— $
(13,302) $
102,484
Net loss
Cumulative-effect adjustment related to ASU 2016-02, net of tax
Issuance of 162,869 shares of common stock from the treasury
Stock options exercised for 3,628 shares, net
Stock-based compensation expense
Balance at December 31, 2019
See accompanying notes to consolidated financial statements.
—
—
—
—
—
—
(1,217)
12
2,091
(3,036)
4,623
—
—
—
—
—
—
—
—
—
1,521
33
—
(3,036)
4,623
304
45
2,091
$
10,300
$
37,407
$
70,552
$
— $
(11,748) $
106,511
36
SYNALLOY CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2019, 2018 and 2017
(in thousands)
Operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
2019
2018
2017
$
(3,036) $
13,097
$
1,341
Depreciation expense
Amortization expense
Amortization of debt issuance costs
Unrealized (gain) loss on equity securities
Deferred income taxes
Gain on sale of available for sale securities
Earn-out adjustments
Payments of earn-out liabilities in excess of acquisition date fair value
(Reduction of) provision for losses on accounts receivable
Provision for losses on inventories
(Gain) loss on sale of property, plant and equipment
Amortization of deferred gain on sale-leaseback
Noncash lease expense
Change in fair value of interest rate swap
Issuance of treasury stock for director fees
Stock-based compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets and liabilities
Accounts payable
Accrued expenses
Accrued income taxes
Net cash provided by (used in) operating activities
Investing activities
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of equity securities
Proceeds from sale of available for sale securities
Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc. ("MUSA")
Acquisition of the galvanized pipe and tube assets of MUSA
Acquisition of ASTI
Net cash (used in) provided by investing activities
Financing activities
(Repayments) borrowings from line of credit
Borrowings from term loan
Net proceeds from at-the-market offering
Payments on long-term debt
Principal payments on finance lease obligations
Payments on earn-out liabilities
Payments of debt issuance costs
Proceeds from exercised stock options
Dividends paid
Tax withholdings related to net share settlements of exercised stock options
Net cash (used in) provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
$
37
7,578
3,486
160
(1,547)
(773)
(326)
(747)
(448)
(171)
1,617
(50)
—
560
(141)
304
2,091
9,696
19,962
179
(5,323)
(3,317)
(1,114)
28,640
(4,537)
189
(544)
1,092
—
—
(21,895)
(25,695)
(17,185)
20,000
—
(3,666)
(106)
(3,627)
—
45
—
—
(4,539)
(1,594)
2,220
626
$
6,412
2,363
132
2,573
(383)
—
1,431
(194)
240
1,828
(18)
(334)
445
(20)
276
827
(10,413)
(41,157)
(1,524)
(234)
2,093
1,339
(21,221)
(7,355)
—
(4,970)
—
—
(10,378)
—
(22,703)
50,492
—
983
—
(337)
(2,261)
(383)
142
(2,215)
(291)
46,130
2,206
14
2,220
$
5,295
2,443
60
—
(1,037)
(310)
688
—
202
1,196
25
(334)
397
(96)
288
638
(10,877)
(7,088)
11,230
7,572
(9,424)
26
2,235
(5,279)
73
(4,383)
4,142
(11,953)
—
—
(17,400)
17,109
—
—
—
(125)
(518)
(200)
—
(1,149)
—
15,117
(48)
62
14
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company") was incorporated in Delaware in 1958 as the successor to a chemical manufacturing
business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc.
The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into two reportable operating segments, the Metals Segment and the Specialty Chemicals
Segment. As of December 31, 2019, the Metals Segment operated as three reportable units including Welded Pipe & Tube
Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and American Stainless Tubing, LLC ("ASTI"), which began
operations effective January 1, 2019 pursuant to our acquisition of substantially all of the assets of American Stainless Tubing,
Inc. ("American Stainless") (see Note 15 to the Consolidated Financial Statements), Palmer of Texas Tanks, Inc. ("Palmer"), and
Specialty Pipe & Tube, Inc. ("Specialty"). Welded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental
stainless steel tubing, and other alloy pipe and tube, Palmer manufactures liquid storage solutions and separation equipment and
Specialty is a master distributor of seamless carbon pipe and tube. The Specialty Chemicals Segment operates as one reportable
unit and is comprised of MC and CRI Tolling, and produces specialty chemicals.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned.
The Metals Segment is comprised of four subsidiaries: Synalloy Metals, Inc. which owns 100 percent of BRISMET, located in
Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman and Statesville, North Carolina; Palmer, located in
Andrews, Texas and Specialty, located in Mineral Ridge, Ohio and Houston, Texas. The Specialty Chemicals Segment consists
of two subsidiaries: MS&C which owns 100 percent of MC, located in Cleveland, Tennessee and CRI Tolling, located in Fountain
Inn, South Carolina. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to
customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout
the United States. The Company provides an allowance for doubtful accounts for projected uncollectable amounts. The allowance
is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The Company
performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables
are generally due within 30 to 60 days. Delinquent receivables are written off based on individual credit evaluations and specific
circumstances of the customer.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted
average methods.
Inventory cost is adjusted when its recorded cost is below net realizable value. At the end of each quarter, all facilities review
recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below cost. This
would indicate that an adjustment would be required.
In addition, the Company establishes inventory reserves for:
• Estimated obsolete or unmarketable inventory. The Company identified inventory items with no sales activity for finished
goods or no usage for raw materials for a certain period of time. For those inventory items not currently being marketed
and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds.
The Company reserved $0.3 million at December 31, 2019 and December 31, 2018, respectively.
• Estimated quantity losses. The Company performs an annual physical count of inventory during the fourth quarter each
year. For those facilities that complete their physical inventory counts before the end of December, a reserve is established
for the potential quantity losses that could occur subsequent to their physical inventory. This reserve is based upon the
38
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
most recent physical inventory results. At December 31, 2019 and December 31, 2018, the Company had $0.4 million
reserved for physical inventory quantity losses.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful
life of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining non-cancellable
lease term, buildings are depreciated over a range of 10 years to 40 years, and machinery, fixtures and equipment are depreciated
over a range of three years to 20 years. The costs of software licenses are amortized over five years using the straight-line method.
The Company continually reviews the recoverability of the carrying value of long-lived assets. The Company also reviews long-
lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be
recoverable. When the future undiscounted cash flows of the operation to which the assets relate do not exceed the carrying value
of the asset, the assets are written down to fair value.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations. Under this method, the total
consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and
liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting
requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible
assets acquired, if any, and liabilities assumed.
Goodwill, Intangible Assets and Deferred Charges
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is
reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate
that the carrying value may not be recoverable. No goodwill impairment was identified as a result of the testing procedures
performed for the years ended December 31, 2019 and December 31, 2018.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions. Deferred charges
represent other intangible assets and debt issuance costs. Intangible assets are amortized over their estimated useful lives using
either an accelerated or straight-line method. Deferred charges are amortized over their estimated useful lives using the straight-
line method. Deferred charges are amortized over a period ranging from three to 10 years and intangible assets are amortized over
a period ranging from eight to 15 years. The weighted average amortization period for the customer relationships is approximately
thirteen years.
Deferred charges and intangible assets totaled $32.6 million and $23.2 million at December 31, 2019 and December 31, 2018,
respectively. Accumulated amortization of deferred charges and intangible assets as of December 31, 2019 and December 31,
2018 totaled $16.6 million and $13.0 million, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets, excluding deferred charges is
as follows:
(in thousands)
2020
2021
2022
2023
2024
Thereafter
3,238
3,051
2,741
1,200
1,043
4,442
The Company recorded amortization expense of $3.5 million for 2019 and $2.4 million for 2018 and 2017, respectively, which
excludes amortization expense of debt issuance costs, which is reflected in the consolidated financial statements as interest expense.
39
Earn-Out Liability
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
In connection with the MUSA-Stainless acquisition on February 28, 2017, the Company is required to make quarterly earn-out
payments to MUSA for a period of four years following closing, based on actual sales levels of stainless steel pipe and tube (outside
diameter of 10 inches or less). The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation
approach using management's estimates of pounds shipped and future price per unit. Changes to the fair value of the earn-out
liability are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the
Consolidated Statements of Operations and Comprehensive Income.
In connection with the MUSA-Galvanized acquisition on July 1, 2018, the Company is required to make quarterly earn-out
payments to MUSA for a period of four years following closing, based on actual sales levels of galvanized pipe and tube. The fair
value of the contingent consideration was estimated by applying the probability-weighted expected return method using
management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are
determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated
Statements of Operations and Comprehensive Income.
In connection with the American Stainless acquisition on January 1, 2019, the Company is required to make quarterly earn-out
payments to American Stainless for a period of three years following closing. Pursuant to the asset purchase agreement between
ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the
three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated
with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. The
fair value of the contingent consideration was estimated by applying the probability weighted expected return method using
management's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability are
determined each quarter-end and charged to income or expense in the “Earn-Out Adjustments” line item in the Consolidated
Statements of Operations and Comprehensive Income.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an
amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Substantially all of the
Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time.
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance
obligation is based on its standalone selling price and revenue is recognized as each performance obligation is satisfied. The
Company generally determines standalone selling prices based on the prices charged to customers using the adjusted market
assessment approach or expected cost plus margin. Deferred revenues are recorded when cash payments are received in advance
of satisfying the performance obligation, including amounts which are refundable.
Shipping Costs
Shipping costs of approximately $10.9 million, $9.8 million and $7.5 million in 2019, 2018 and 2017, respectively, are recorded
in cost of goods sold.
Research and Development Expenses
The Company incurred research and development expense of approximately $0.6 million, $0.5 million and $0.6 million in 2019,
2018 and 2017, respectively.
Stock-Based compensation
Share-based payments to employees, including grants of employee stock options, are recognized in the Consolidated Statements
of Operations as compensation expense (based on their estimated fair values at grant date) generally over the vesting period of
the awards using the straight-line method. Any forfeitures of stock-based awards are recorded as they occur. See Note 7 for
disclosures related to stock-based compensation.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing accounts and their
respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely
than not that such assets will be realized.
40
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Additionally, the Company maintains reserves for uncertain tax provisions, if necessary.
Earnings Per Share of Common Stock
Earnings per share of common stock are computed based on the weighted average number of basic and diluted shares outstanding
during each period.
Fair Market Value
The Company makes estimates of fair value in accounting for certain transactions, in testing and measuring impairment and in
providing disclosures of fair value in its consolidated financial statements. The Company determines the fair values of its financial
instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs
when measuring fair value. Fair value disclosures for assets and liabilities are grouped in three levels. The levels prioritize the
inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs
include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities
in markets that are less active.
Level 3 - Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain
pricing models, discounted cash flow methodologies and similar techniques.
Estimates of fair value using levels 2 and 3 may require judgments as to the timing and amount of cash flows, discount rates, and
other factors requiring significant judgment, and the outcomes may vary widely depending on the selection of these assumptions.
The Company's most significant fair value estimates as of December 31, 2019 and December 31, 2018 relate to the purchase price
allocation relating to the 2019 American Stainless, 2018 MUSA-Galvanized, and 2017 MUSA-Stainless acquisitions, earn-out
liabilities, estimating the fair value of the reporting units in testing goodwill for impairment, estimating the fair value of the interest
rate swap, and providing disclosures of the fair values of financial instruments.
Leases
The Company determines whether an arrangement is a lease at contract inception. For leases in which the Company is the lessee,
the Company recognizes a right-of-use asset and corresponding lease liability on the accompanying Consolidated Balance Sheets
equal to the present value of the fixed lease payments over the lease term. Leases with an initial term of 12 months or less are not
recorded on the Consolidated Balance Sheets. Lease liabilities represent an obligation to make lease payments arising from a lease
while right-of-use assets represent a right to use an underlying asset during the lease term. As the Company's leases generally do
not have a readily determinable implicit rate, the Company uses its incremental borrowing rate to determine the present value of
fixed lease payments based on information available at the lease commencement date.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions, primarily for
testing goodwill for impairment, determining balances for the earn-out liabilities, estimating fair value of identifiable assets acquired
and liabilities assumed as a result of business acquisitions and for establishing reserves on accounts receivable, inventories and
environmental issues, that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash
deposits and trade accounts receivable.
Recent accounting pronouncements
Recently Issued Accounting Standards - Adopted
In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)", as amended, which generally requires lessees to
recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide
enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The
Company adopted the new standard as of January 1, 2019 on a modified retrospective basis, which does not require comparative
periods to be restated. The Company elected the package of practical expedients permitted under the transition guidance which
41
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
allowed us to carry-forward our historical lease classification, our assessment on whether a contract contains a lease, and our initial
direct costs for any leases that exist prior to adoption of the new standard. The Company did not elect the hindsight practical
expedient to determine the reasonably certain lease term for existing leases. The Company also elected to combine lease and non-
lease components and elected the short-term lease recognition exemption for all leases that qualified. On adoption, we recognized
additional operating lease liabilities of $33.1 million based on the present value of the remaining minimum rental payments as of
January 1, 2019. We additionally recognized corresponding right-of-use assets for operating leases totaling $32.2 million. On
January 1, 2019, the Company also recorded cumulative-effect increases to equity and deferred tax assets totaling $4.6
million and $1.3 million, respectively, related to a deferred gain for a sale leaseback transaction that occurred in 2016 and was
being amortized into earnings under the prior accounting. The adoption of this standard did not have a material impact on the
consolidated statement of operations or cash flows for the year ended December 31, 2019. See Note 10 for further information
related to the Company's leases.
In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)." Topic 606 supersedes
the revenue recognition requirements in Topic 605 "Revenue Recognition (Topic 605)," and requires entities to recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the
modified retrospective transition method. The adoption of this standard did not have a material effect on the Company's consolidated
financial statements. See Note 17 for further details.
Recently Issued Accounting Standards - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments." The updated guidance amends the current accounting guidance and requires the
measurement of all expected losses based on historical experience, current conditions, and reasonable and supportable forecasts
rather than the incurred loss model which reflects losses that are probable. The updated guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company
does not expect the adoption of this new standard to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill
Impairment." The updated guidance eliminated step two of the goodwill impairment test and specifies that goodwill
impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the
amount of goodwill allocated to a reporting unit with a zero or negative carrying amount of net assets should be disclosed. The
updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019,
with early adoption permitted. The Company does not expect the adoption of this new standard to have a material impact on the
consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement." The updated guidance improves the disclosure requirements on
fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company does
not expect the adoption of this new standard to have a material impact on the consolidated financial statements or footnote
disclosures.
In December 2019, the FASB issued ASU No. 2018-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes." This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation,
and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas, including
recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The updated guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption
permitted. The Company is currently assessing the impact that adopting this new standard will have on its condensed
consolidated financial statements and footnote disclosures.
42
Note 2: Fair Value of Financial Instruments
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either
directly or indirectly, including:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
•
Inputs that are derived principally from or corroborated by other observable market data.
•
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant
management judgment. These values are generally determined using model-based techniques, including option pricing models,
discounted cash flow models, probability weighted models, and Monte Carlo simulations.
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts
payable, earn-out liabilities, revolving line of credit and equity investments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure
fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level
input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the
fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Level 1: Equity securities
The fair value of equity securities held by the Company as of December 31, 2019 and December 31, 2018 was $4.3 million and
$2.9 million, respectively, and is included in "Prepaid expenses and other current assets" on the accompanying Consolidated
Balance Sheets.
Level 2: Derivative instruments
The Company had one interest rate swap contract, which is classified as a Level 2 financial instrument as it is not actively traded
and is valued using pricing models that use observable inputs. The fair value of the interest swap contract entered into on August
21, 2012 was an asset of $6,088 and $0.1 million at December 31, 2019 and December 31, 2018, respectively. The interest rate
swap was priced using discounted cash flow techniques. Changes in its fair value were recorded to other income (expense) with
corresponding offsetting entries to current assets or liabilities, as appropriate. Significant inputs to the discounted cash flow model
include projected future cash flows based on projected one-month LIBOR and the average margin for companies with similar
credit ratings and similar maturities. See Note 14 for for further discussion of the interest rate swap.
Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration liabilities ("earn-out") resulting from the 2017 MUSA-Stainless acquisition, 2018
MUSA-Galvanized acquisition, and 2019 American Stainless acquisition are classified as Level 3. The fair value of the MUSA-
Stainless earn-out was estimated by applying the Monte Carlo Simulation approach using management's projection of pounds to
be shipped and future price per unit. The fair value of the MUSA-Galvanized earn-out was estimated by applying the probability-
weighted expected return method, using management's projection of pounds to be shipped and future price per unit. The fair value
of the American Stainless earn-out was estimated by applying the probability-weighted expected return method using management's
estimates of pounds to be shipped and future price per unit. Each quarter-end, the Company re-evaluates its assumptions for all
earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are
reflected in the results of operations in the periods in which they are identified. Changes in the fair value of the earn-out liabilities
may materially impact and cause volatility in the Company's operating results.
43
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a
recurring basis for 2019 and 2018:
(in thousands)
Balance at December 31, 2017
Fair value of the earn-out liability associated with the MUSA-
Galvanized acquisition
Earn-out payments during the period
Changes in fair value during the period
Balance at December 31, 2018
Fair value of the earn-out liability associated with the American
Stainless (ASTI) acquisition
Earn-out payments during period
Changes in fair value during the period
Balance at December 31, 2019
MUSA-
Stainless
$
4,834
MUSA-
Galvanized
$
— $
American
Stainless
Total
—
(2,164)
1,582
3,800
(291)
(151)
$
4,252
$
3,358
$
— $
4,834
— $
— $
— $
— $
3,800
(2,455)
1,431
7,610
—
(1,634)
(215)
—
(712)
(864)
$
2,403
$
1,782
$
6,366
$
6,366
(1,729) $
(4,075)
332
4,969
$
$
(747)
9,154
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company's only significant measurements of assets and liabilities at fair value on a non-recurring basis subsequent to their
initial recognition were certain acquisition related assets and liabilities as of December 31, 2019 and December 31, 2018,
respectively.
Customer List Intangible Asset
During the second quarter of 2019, management revised the initial estimate of the fair value of the customer list intangible asset
acquired during the American Stainless acquisition, resulting in a decrease to the customer list intangible asset of $0.5 million
(see Note 15 to the consolidated financial statements for additional information regarding this fair value measurement).
In the fourth quarter of 2018, management adjusted the fair value of the customer list intangible asset acquired during the
MUSA-Galvanized acquisition by $0.3 million (see Note 15 to the consolidated financial statements for additional information
regarding this fair value measurement).
Contingent consideration (earn-out) liabilities
During the second quarter of 2019, management revised the initial estimate of the fair value of the contingent consideration
(earn-out) liability from the American Stainless acquisition, resulting in an increase to the earn-out liability of $0.2 million (see
Note 15 to the consolidated financial statements for additional information regarding this fair value measurement).
Fair Value of Financial Instruments
For short-term instruments, other than those required to be reported at fair value on a recurring and non-recurring basis and for
which disclosures are included above, management concluded the historical carrying value is a reasonable estimate of the fair
value because of the short period of time between origination of such instruments and their expected realization. Therefore, as
of December 31, 2019 and December 31, 2018, the carrying amount for cash and cash equivalents, accounts receivable,
accounts payable, and the Company's revolving line of credit, which is based on a variable rate, approximates fair value.
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 or changes in the fair value methodologies
used by the Company in the years ended December 31, 2019 or December 31, 2018.
44
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 3: Property, Plant and Equipment
Property, plant and equipment consist of the following:
(in thousands)
Land
Leasehold improvements
Buildings
Machinery, fixtures and equipment
Construction-in-progress
Less accumulated depreciation
Property, plant and equipment, net
2019
2018
$
63
$
1,921
214
100,300
2,999
105,497
64,807
$
40,690
$
63
1,163
412
92,931
3,644
98,213
57,288
40,925
The Company recorded depreciation expense of $7.6 million, $6.4 million, and $5.3 million for 2019, 2018 and 2017, respectively.
Note 4: Goodwill
Changes in the carrying amount of goodwill by segment for the year ended December 31, 2019 and December 31, 2018 are as
follows:
(in thousands)
Balance at December 31, 2017
MUSA-Galvanized Acquisition
Balance at December 31, 2018
American Stainless Acquisition
Balance December 31, 2019
Note 5: Long-term Debt
(in thousands)
$100 million Revolving line of credit, due December 20, 2021
$20 million Term loan, due January 1, 2024
Specialty
Chemicals
Segment
$
$
$
1,355
—
1,355
—
1,355
Metals Segment
Total
$
$
$
$
$
$
4,649
3,796
8,445
7,758
16,203
$
$
$
6,004
3,796
9,800
7,758
17,558
2019
2018
59,221
16,333
75,554
$
$
$
76,405
—
76,405
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an
asset-based revolving line of credit (the "Line") in the amount of $45 million. The Line was used to refinance and consolidate all
previous debt agreements. Interest on the Line was calculated using the One Month LIBOR Rate (as defined in the Credit
Agreement), plus a pre-defined spread. Borrowings under the Line were limited to an amount equal to a Borrowing Base calculation
(as defined in the Credit Agreement) that includes eligible accounts receivable and inventory.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible assets, including the stock
and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the real
estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 10.
On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $20 million
to a maximum of $65 million and extended the maturity date. None of the other provisions of the Credit Agreement were changed
as a result of this amendment.
On June 29, 2018, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $15 million to a
maximum of $80 million. As a result of the amendment, the interest rate on the Line is now calculated using One Month LIBOR
plus a spread of 1.65 percent. None of the other provisions of the Credit Agreement were changed as a result of this amendment.
45
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its Line from $80
million to $100 million and to create a new 5-year term loan in the principal amount of $20 million (the “Term Loan”). The Term
Loan was used to finance the American Stainless acquisition (see Note 15). The Term Loan’s maturity date is February 1, 2024
and shall be repaid in 60 consecutive monthly installments. Interest on the Term Loan is calculated using the One Month LIBOR
Rate (as defined in the Credit Agreement), plus 1.90 percent. The Line will be used for working capital needs and as a source for
funding future acquisitions. The maturity date has been extended to December 20, 2021. Interest on the Line remains unchanged
and is calculated using the One Month LIBOR Rate, plus 1.65 percent. Borrowings under the Line are limited to an amount equal
to a Borrowing Base calculation that includes eligible accounts receivable and inventory.
Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a minimum
tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with
currently projected needs. The Company evaluated this transaction and determined the restructuring should be accounted for as
a debt modification. The Company incurred lender and third-party costs associated with the debt restructuring that were capitalized
on the balance sheet in non-current assets. At December 31, 2019, the Company was in compliance with all debt covenants.
The Line interest rate was 3.50 percent and 4.19 percent at December 31, 2019 and December 31, 2018, respectively. Additionally,
the Company is required to pay a fee equal to 0.15 percent on the average daily unused amount of the Line on a quarterly basis. As
of December 31, 2019, the amount available for borrowing under the Line was $72.6 million of which $59.2 million was borrowed,
leaving $13.4 million of availability. Average Line borrowings outstanding during fiscal 2019 and 2018 were $69.1 million and
$49.0 million with weighted average interest rates of 5.52 percent and 4.51 percent, respectively.
The term loan interest rate was 3.69 percent at December 31, 2019. As of December 31, 2019, the Company had outstanding
borrowings against the term loan of $16.3 million.
The Company made interest payments on all credit facilities of $3.5 million in 2019, $1.7 million in 2018 and $0.9 million in
2017.
Principal payments on long-term debt during the next five fiscal years and thereafter are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Note 6: Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
Salaries, wages, and commissions
Taxes, other than income taxes
Current portion of earn-out liability
Advances from customers
Insurance
Professional fees
Warranty reserve
Benefit plans
Insurance financing liability
Current portion, capital lease obligation
Customer rebate liability
Current portion, deferred gain sale-leaseback
Other accrued items
Total accrued expenses
4,000
63,221
4,000
4,000
333
—
2019
2018
2,972
406
5,576
153
578
265
11
242
668
39
275
—
5,208
852
2,907
178
321
256
38
266
347
267
701
334
428
11,613
$
488
12,163
$
46
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 7: Stock-Based Compensation
Overview of Stock-Based Compensation Plans
The Company has a number of active equity incentive plans under which the Company has been authorized to grant share-based
awards to key employees and non-employee directors. A total of 500,000 shares have been previously authorized for grant to key
employees and non-employee directors. As of December 31, 2019, there were 215,823 shares remaining available for grants under
the currently active equity incentive plans.
The Company recognized stock-based compensation expense within SG&A expense on the consolidated statement of earnings of
$2.1 million, $0.8 million, and $0.6 million in 2019, 2018, and 2017, respectively. The associated income tax benefit recognized
was $0.4 million for 2019, and $0.2 million for 2018 and 2017, respectively.
Stock Options
2011 Long-Term Incentive Stock Option Plan
The 2011 Long-Term Incentive Stock Option Plan (the "2011 Plan") is an incentive stock option plan; therefore, there are no
income tax consequences to the Company when an option is granted or exercised. The stock options will vest in 20 percent or 33
percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the options to vest, the
employee must be in the continuous employment of the Company since the date of the grant. Except for death, disability, or
qualifying retirement, any portion of the grant that has not vested will be forfeited upon termination of employment. Shares
representing grants that have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting
rights with respect to any shares not yet vested, and the shares are not transferable.
A summary of activity in the Company's stock option plans is as follows:
Weighted
Average
Exercise
Price
Options
Outstanding
Weighted
Average
Contractual
Term
(in years)
Intrinsic
Value of
Options
Options
Available
At December 31, 2016
Exercised
Expired
At December 31, 2017
Exercised
Expired
At December 31, 2018
Exercised
At December 31, 2019
Exercisable options
Options expected to vest:
December 31, 2017
Vested
Forfeited unvested options
At December 31, 2018
Vested
At December 31, 2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.77
11.55
15.26
12.96
12.09
16.01
14.16
12.61
14.26
14.13
14.72
14.78
16.01
15.83
15.72
16.01
152,965
1,905
154,870
975
155,845
—
155,845
5.4
4.6
4.8
3.8
3.7
6.5
6.0
5.1
$
$
$
$
$
$
$
—
78,818
156,445
842,742
143,737
18,331
18,331
Grant Date Fair
Value
$
$
$
$
$
6.41
6.38
6.44
6.46
6.11
173,048
(25,632)
(1,905)
145,511
(85,440)
(975)
59,096
(3,628)
55,468
51,745
25,650
(15,380)
(301)
9,969
(6,246)
3,723
47
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at December 31, 2019:
Outstanding Stock Options
Exercisable Stock Options
Weighted Average
Range of
Exercise Prices
Shares
Exercise Price
Remaining
Contractual Life
in Years
Shares
Weighted
Average Exercise
Price
$
$
$
$
11.35
13.70
14.76
16.01
$
$
$
$
11,713
13,994
8,109
21,652
55,468
11.35
13.70
14.76
16.01
2.10
3.10
4.14
5.11
$
$
$
$
11,713
13,994
8,109
17,929
51,745
11.35
13.70
14.76
16.01
In 2019 and 2018, options for 3,628 and 85,440 shares, respectively, were exercised by employees and directors for an aggregate
exercise price of $45,734 and $1.0 million, respectively.
At the 2019, 2018 and 2017 respective year ends, options to purchase 51,745, 49,127 and 119,861 shares, respectively, with
weighted average exercise prices of $14.13, $13.82 and $12.45, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was approximately $31,186 for 2019, $46,529 for 2018
and $80,966 for 2017. As of December 31, 2019, there was $2,261 of unrecognized compensation cost related to unvested stock
options granted under the Company's stock option plans. The weighted average period over which the stock option compensation
cost is expected to be recognized is 0.11 years.
Restricted Stock Awards
2005 Stock Awards Plan
The Compensation & Long-Term Incentive Committee ("Compensation Committee") of the Board of Directors of the Company
approved stock grants under the Company's 2005 Stock Awards Plan to certain management employees of the Company. The stock
grants will vest in 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant.
In order for the grants to vest, the employee must be in the continuous employment of the Company since the date of the grant.
Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that
have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to
any shares not yet vested, and the shares are not transferable.
2015 Stock Awards Plan
The 2015 Stock Awards Plan was approved by the Compensation Committee and authorizes the issuance of up to 250,000 shares
which can be awarded for a period of 10 years from the effective date of the plan. Prior to May 9, 2017, as discussed below, the
stock awards vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of grant from shares
held in treasury with the Company. In order for the awards to vest, the employee must be in the continuous employment of the
Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not
vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested
upon an employee's failure to comply with all conditions of the award or the 2015 Stock Awards Plan. An employee is not entitled
to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
On February 8, 2017, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain
management employees of the Company where 44,687 shares with a market price of $12.30 per share were granted under the Plan.
Effective May 1, 2017, the Company's Board of Directors approved the First Amendment to the 2015 Stock Awards Plan. The
amendment grants the Compensation Committee the authority to establish and amend vesting schedules for stock awards made
pursuant to the 2015 Stock Awards Plan. On May 9, 2017, the Committee approved the amendment of the vesting schedules for
the May 5, 2016 and February 8, 2017 stock grants reducing the vesting period from five years to three years. As a result of this
amendment, compensation expense increased in 2017 by $75,756 and $67,180, for the five employees receiving grants on May
5, 2016 and eight employees receiving grants on February 8, 2017, respectively.
On February 7, 2018, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain
management employees of the Company where 65,527 shares with a market price of $12.47 per share were granted under the Plan.
48
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
These stock awards vest in either 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after
the date of grant.
On February 6, 2019, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain
management employees of the Company where 44,949 shares with a market price of $15.72 per share were granted under the Plan.
These stock awards vest in either 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after
the date of grant.
On May 17, 2018, a majority of the shareholders of the Company, upon the recommendation of the Company's Board of Directors,
voted to amend and restate the 2015 Stock Awards Plan to increase the authorization of issuances from 250,000 shares to 500,000
shares.
A summary of plan activity for the 2005 and 2015 Stock Awards Plans is as follows:
Outstanding at December 31, 2016
Granted February 8, 2017
Vested
Outstanding at December 31, 2017
Granted February 7, 2018
Vested
Forfeited
Outstanding at December 31, 2018
Granted February 6, 2019
Vested
Forfeited
Outstanding at December 31, 2019
Weighted
Average
Grant Date
Fair Value
Shares
121,302
$
$
44,687
(34,322) $
$
131,667
$
65,527
(51,775) $
(3,245) $
$
142,174
$
44,949
(84,734) $
(1,614) $
$
100,775
10.03
12.30
10.45
10.69
12.47
10.84
10.96
11.45
15.72
11.76
12.44
13.28
Compensation expense on the grants issued is charged against earnings equally before forfeitures, if any, with the offset recorded
in Shareholders' Equity. Compensation cost charged against income for the awards was approximately $1.4 million for 2019, $0.8
million, for 2018 and $0.6 million for 2017. As of December 31, 2019, there was $0.8 million of total unrecognized compensation
cost related to unvested stock grants under the Company's Stock Awards Plan. The weighted average period over which the stock
grant compensation cost is expected to be recognized is 2.11 years.
Performance-Based Restricted Stock Awards
The Company issues performance-based restricted stock classified as equity awards. Expense is recognized on a straight-line
method over the requisite service period, based on the probability of achieving the performance condition, with changes in
expectations recognized as an adjustment to earnings in the period of change. Compensation cost is not recognized for performance-
based restricted stock awards that do not vest because service or performance conditions are not satisfied and any previously
recognized compensation cost is reversed. Performance-based restricted stock awards do not have dividend rights. The Company
recognized forfeitures as they occur.
The Company's performance-based restricted stock awards are classified as equity and contain performance and service conditions
that must be satisfied for an employee to earn the right to benefit from the award. The performance condition is based on the
achievement of the Company's EBITDA targets. The fair value of the performance-based restricted stock awards are determined
based on the closing market price of our stock on the date of grant.
In general, 0% to 150% of the Company's performance-based restricted stock awards vest at the end of a three year service period
from the date of grant based upon achievement of the specified performance condition.
The total fair value of performance-based restricted stock awards vesting was approximately $0.4 million in 2019. There were no
performance-based restricted stock awards that vested in 2018 or 2017, respectively.
49
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
A summary of the status of our non-vested performance-based restricted stock awards at December 31, 2019, and changes
during fiscal 2019, were as follows:
Outstanding at December 31, 2018
Granted
Vested(2)
Forfeited/Canceled
Units(1)
Weighted-Average
Grant Date Fair
Value
100,037
$
35,887
$
(57,938) $
— $
10.56
15.72
9.58
—
13.66
Non-vested at December 31, 2019
(1)The number of units presented is based on achieving the targeted performance goals as defined in the performance award agreement. As of December 31, 2019, the maximum number of non-
77,986
$
vested shares under the provisions of the agreement was 116,979.
(2) Excludes the vesting of an additional 4,284 shares due to performance conditions of the awards exceeding target.
At December 31, 2019, there was $0.2 million of unrecognized compensation expense related to non-vested performance-based
restricted stock awards that is expected to be recognized over a weighted-average period of 1.36 years.
Non-Employee Director Compensation Plan
Each year, the Company allows each non-employee director to elect to receive up to 100 percent of the director's annual retainer
in restricted stock. The number of restricted shares issued is determined by the average of the high and low common stock price
on the day prior to the Annual Meeting of Shareholders or the date prior to the appointment to the Board for those individuals that
are appointed mid-term. On May 16, 2019, May 17, 2018 and May 18, 2017, non-employee directors received an aggregate of
15,909, 14,857 and 24,209 shares, respectively, of restricted stock in lieu of total retainer fees of $304,000, $276,000 and $287,500,
respectively. The shares granted to the directors are not registered under the Securities Act of 1933 and are subject to forfeiture in
whole or in part upon the occurrence of certain events.
50
Note 8: Income Taxes
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred
tax liabilities and assets are as follows at the respective year ends:
(in thousands)
Deferred income tax assets:
Sale leaseback deferred gain
Inventory valuation reserves
Inventory capitalization
Accrued bonus
State net operating loss carryforwards
Federal net operating loss carryforwards
Equity security mark to market
Straight line lease
Lease liabilities
Interest limitation carryforwards
Other
Total deferred income tax assets
Valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities:
Tax over book depreciation and amortization
Prepaid expenses
Lease assets
Interest rate swap
Other
Total deferred income tax liabilities
Deferred income taxes
2019
2018
$
— $
199
1,696
497
1,835
139
217
—
8,945
754
445
14,727
(1,700)
13,027
4,859
296
8,537
77
48
13,817
$
(790) $
1,311
174
1,501
911
1,934
—
622
231
150
—
453
7,287
(1,766)
5,521
5,121
377
92
104
80
5,774
(253)
Significant components of the provision for income taxes from continuing operations are as follows:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
2019
2018
2017
$
$
(10) $
57
47
(833)
59
(774)
(727) $
3,469
$
290
3,759
(108)
(275)
(383)
3,376
$
1,067
107
1,174
(1,043)
6
(1,037)
137
51
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:
(in thousands)
Amount
%
Amount
%
Amount
%
Tax at U.S. statutory rates
$
(790)
21.0 % $
3,459
21.0 % $
503
34.0 %
2019
2018
2017
State income taxes, net of federal
tax benefit
State valuation allowance
Manufacturing exemption
Stock option compensation
Executive compensation limitation
Other nondeductible expenses
Rate change effects
Other, net
Total
$
165
(60)
—
(155)
57
64
—
(8)
(727)
(4.4)%
1.6 %
— %
4.1 %
(1.5)%
(1.7)%
— %
0.2 %
269
(315)
—
(39)
—
—
—
2
1.6 %
(1.9)%
— %
(0.2)%
— %
— %
— %
— %
19.3 % $
3,376
20.5 % $
66
8
(117)
—
—
—
(381)
58
137
4.4 %
0.6 %
(7.9)%
— %
— %
— %
(25.8)%
4.0 %
9.3 %
Income tax payments of $1.2 million, $2.4 million and $2.6 million were made in 2019, 2018 and 2017, respectively. The Company
has US Federal net operating loss carryforwards of $0.7 million and interest limitation carryforwards of $3.5 million at the end
of fiscal year 2019. Such items are not subject to expiration. The Company also had state net operating loss carryforwards at the
end of fiscal years 2019 and 2018 of $43.6 million and $46.5 million, respectively. The majority of these losses will expire between
the years of 2020 and 2037, while various losses are not subject to expiration. A valuation allowance has been set up against $40.3
million of these state net operating loss carryforwards because it is not more likely than not that the losses will be realized in the
foreseeable future. The portion of the valuation allowance for the state net operating loss carryforwards was $1.7 million at
December 31, 2019 and December 31, 2018 respectively. In addition, $47,504 and $76,747 valuation allowance was established
at December 31, 2019 and 2018 respectively, for other deferred tax assets. This resulted in a valuation allowance decrease of
$66,744.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The
Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before
2014.
The Company had no uncertain tax position activity during 2019 or 2018. The Company's continuing practice is to recognize
interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain
tax positions including interest and penalties at the end of 2019.
Note 9: Benefit Plans and Collective Bargaining Agreements
The Company has a 401(k) Employee Stock Ownership Plan (the "401(k)/ESOP Plan") covering all non-union employees.
Employees could contribute to the 401(k)/ESOP Plan up to 100 percent of their wages with a maximum of $19,000 for 2019.
Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional
$6,000 per year for a maximum of $25,000 for 2019. Contributions by the employees are invested in one or more funds at the
direction of the employee; however, employee contributions cannot be invested in Company stock. For the year ended December
31, 2015, contributions by the Company were made in cash and then used by the 401(k)/ESOP Plan Trustee to purchase Company
stock. Effective January 1, 2016, contributions by the Company are made in accordance with the investment elections made by
each participant for his or her deferral contributions. The Company contributes on behalf of each eligible participant a matching
contribution equal to a percentage determined each year by the Board of Directors. For 2019, 2018 and 2017 the maximum was
100 percent of employee contributions up to a maximum of four percent of their eligible compensation. The matching contribution
is applied to the employee accounts after each payroll. Matching contributions of approximately $0.8 million, $0.7 million and
$0.6 million were made for 2019, 2018 and 2017, respectively. The Company may also make a discretionary contribution, which
if made, would be distributed to all eligible participants regardless of whether they contribute to the 401(k)/ESOP Plan. No
discretionary contributions were made to the 401(k)/ESOP Plan in 2019, 2018 or 2017.
The Company also has a 401(k) and Profit Sharing Plan (the "Bristol Plan") covering all employees as part of the United Steel
Workers of America, Local Union 4586 Collective Bargaining Agreement (the "Bristol CBA"). Employees could contribute to
the Bristol Plan up to 60 percent of pretax annual compensation, as defined in the Bristol Plan, with a maximum of $19,000 for
2019. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an
52
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
additional $6,000 per year for a maximum of $25,000 for 2019. The Company contributes three percent of a participant's eligible
compensation for the plan year, regardless of whether the participants contribute to the Bristol Plan. The Company's contributions
were $0.2 million for 2019, 2018 and 2017, respectively. Additional profit sharing amounts may also be contributed at the option
of the Company's Board of Directors, which if made, would be allocated to participants based on the ratio of the participant's
compensation to the total compensation of all participants eligible to participate in the Bristol Plan. No discretionary contributions
were made to the Bristol Plan in 2019, 2018 or 2017.
In connection with the MUSA-Stainless acquisition discussed in Note 15, the Company assumed the rights and obligations pursuant
to the Collective Bargaining Agreement (the "Munhall CBA") between MUSA and the United Steel Workers of America, Local
Union 5852-22 (the " Munhall Union"). As a part of this Munhall CBA, the Company assumed the obligation of participating in
the Steelworkers Pension Trust, a union-sponsored multi-employer defined benefit plan (the "Munhall Plan"), which covers all
the Company's eligible Munhall Union employees. The Munhall Plan has a calendar plan year. Per the most recent available annual
funding notice, the plan was at least 80 percent funded for the plan year ended December 31, 2018. Per the terms of the Munhall
CBA the Company contributes 4.25 percent of each participant's eligible compensation for the 2019 plan year. Munhall Union
employees make no contributions to the Munhall Plan. The Company's contributions are less than 5 percent of total contributions
to the plan based on contributions for the plan year ended December 31, 2018. The Company's contributions to the Munhall Plan
totaled $0.2 million for the year ended December 31, 2019 and $0.1 million for the years ended December 31, 2018 and
December 31, 2017, respectively. Additionally, as part of the Munhall CBA, members of the union are eligible to make deferral
contributions to the Company's 401(k)/ESOP Plan per the plan guidelines; however they do not receive matching contributions
of the 401(k)/ESOP Plan.
The Company also maintains a Collective Bargaining Agreement ( the "Mineral Ridge CBA") with the United Steel Workers of
America, Local Union 4564-07, which represents employees at the Specialty-Mineral Ridge facility. In connection with the Mineral
Ridge CBA, the Company contributes to union-sponsored defined contribution retirement plans. Contributions relating to these
plans were $28,469, $32,034 and $29,042 for 2019, 2018 and 2017, respectively.
Note 10: Leases
Adoption of ASC Topic 842, "Leases"
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place
as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The
Company's portfolio of leases contains both finance and operating leases that relate to real estate and manufacturing equipment.
Substantially all of the value of the Company's lease portfolio relates to the Master Lease with Store Master Funding XII, LLC,
an affiliate of Store Capital Corporation ("Store Capital") that was entered into in 2016 and amended with the 2018 MUSA-
Galvanized and 2019 American Stainless acquisitions. As of December 31, 2019, operating lease liabilities related to the master
lease agreement with Store Capital totaled $36.8 million, or 97 percent of the total lease liabilities on the consolidated balance
sheet.
Discount Rate
To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was
required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount
equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR"). The Company
determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing
options and certain lease-specific circumstances. Such adjustments included assuming the Store Capital lease would require two
lenders with the secondary lender being secured on a second lien requiring mezzanine rates. Based on this assessment, the Company
determined that 7.32 percent was an appropriate incremental borrowing rate to apply to its portfolio of real-estate operating leases
at adoption. The Company elected to utilize a single discount rate for its portfolio of operating leases because of similar lease
characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases.
Weighted average discount rates for operating and finance leases are as follows:
Operating Leases
Finance Leases
7.32%
11.94%
53
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Balance Sheet Presentation
Operating and finance lease amounts included in the Consolidated Balance Sheet are as follows (in thousands):
Classification
Financial Statement Line Item
December 31, 2019
Assets
Assets
Right-of-use assets, operating leases
Property, plant and equipment, net
Current liabilities
Current liabilities
Current portion of lease liabilities, operating leases
Current portion of lease liabilities, finance leases
Non-current liabilities
Non-current portion of lease liabilities, operating leases
Non-current liabilities
Non-current portion of lease liabilities, finance leases
$
35,772
401
3,562
253
33,723
336
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
(in thousands)
Operating lease cost
Finance lease cost:
Reduction in carrying amount of right-of-use assets
Interest on finance lease liabilities
Total lease cost
December 31, 2019
$
$
4,112
175
85
4,372
Reduction in carrying amounts of right-of-use assets held under finance leases is included in depreciation expense. Minimum
rental payments under operating leases are recognized on a straight-line method over the term of the lease including any periods
of free rent and are included in selling, general, and administrative expense on the consolidated statement of operations.
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of December 31, 2019 are as follows:
(in thousands)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted minimum future lease payments
Imputed Interest
Total lease liabilities
Additional Information
Operating
Finance
3,562
3,635
3,673
3,563
3,635
48,554
66,622
29,337
$
37,285
$
275
316
12
—
—
—
603
14
589
16.55 years
2.16 years
Weighted average remaining lease terms for operating and finance leases as of December 31, 2019 are as follows:
Operating Leases
Finance Leases
During the year ended December 31, 2019, right-of-use assets recognized in exchange for new operating lease liabilities totaled
$4.9 million.
54
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On January 1, 2019, the Company and Store Capital amended and restated the Master Lease, pursuant to which the Company
leases the Statesville and Troutman, NC facilities, purchased by Store Capital from American Stainless on January 1, 2019, for
the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of 10 years each. Because the
Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term
and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to
the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or 2 percent.
Undiscounted future minimum lease payments under non-cancellable operating and capital leases as of December 31, 2018
accounted for under ASC 840 "Leases" were as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Operating
Capital
$
3,207
$
3,244
3,239
3,225
3,103
45,337
354
358
347
18
—
—
1,077
165
912
Total undiscounted minimum future operating lease payments
Imputed Interest
Total lease liabilities recorded as of December 31, 2018
$
Rent expense related to operating leases was $4.0 million and $3.3 million in 2018 and 2017, respectively.
Note 11: Commitments and Contingencies
Management is not currently aware of any asserted or unasserted matters which could have a significant effect on the financial
condition or results of operations of the Company.
Note 12: (Loss)/Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except per share data)
2019
2018
2017
Numerator:
Net (loss) income
Denominator:
$
(3,036) $
13,097
$
1,341
Denominator for basic earnings per share - weighted average
shares
Effect of dilutive securities:
Employee stock options and stock grants
Denominator for diluted earnings per share - weighted average
shares
8,983
—
8,983
8,806
72
8,878
Net (loss) earnings per share:
Basic
Diluted
$
$
(0.34) $
(0.34) $
1.49
1.48
$
$
8,705
23
8,728
0.15
0.15
The diluted earnings per share calculations exclude the effect of potentially dilutive shares when the inclusion of those shares in
the calculation would have an anti-dilutive effect. The Company had weighted average shares of common stock of 300 in 2019,
600 in 2018 and 86,524 in 2017, which were not included in the diluted earnings per share calculation as their effect was anti-
dilutive.
55
Note 13: Industry Segments
The Company's business is divided into two operating segments: Metals and Specialty Chemicals. The Company identifies such
segments based on products and services, long-term financial performance and end markets targeted. The Metals Segment operates
as three reporting units including Welded Pipe & Tube Operations, a unit that includes Bristol Metals, LLC ("BRISMET") and
American Stainless Tubing, LLC ("ASTI"), Palmer of Texas Tanks, Inc. ("Palmer"), and Specialty Pipe & Tube, Inc.
("Specialty").Welded Pipe & Tube Operations manufactures pipe and tube from stainless steel, galvanized, ornamental stainless
steel tubing, and other alloy pipe and tube. Palmer manufactures liquid storage solutions and separation equipment. Specialty is
a master distributor of seamless carbon pipe and tube. The Metals Segment's markets include the oil and gas, chemical,
petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste water treatment, liquid natural gas
("LNG"), brewery, food processing, petroleum, pharmaceutical, automotive & commercial transportation, appliance, architectural,
and other heavy industries. The Specialty Chemicals Segment operates as one reporting unit which includes Manufacturers
Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical Company ("MS&C"), and CRI Tolling,
LLC ("CRI Tolling"). The Specialty Chemicals Segment produces specialty chemicals for the chemical, paper, metals, mining,
agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture, janitorial and other industries. MC
manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical
tolling manufacturing resources to global and regional chemical companies and contracts with other chemical companies to
manufacture certain, pre-defined products.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the
primary measure being operating income (loss). The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Segment operating income is the segment's total revenue less operating expenses. Identifiable assets, all of which are located in
the U.S., are those assets used in operations by each segment. Centralized data processing and accounting expenses are allocated
to the two segments based upon estimates of their percentage of usage. Corporate assets consist principally of cash, certain
investments and equipment.
56
Segment Information:
All values are for continuing operations only.
(in thousands)
Net sales
Metals Segment
Specialty Chemicals Segment
Operating (loss) income
Metals Segment
Gain on sale-leaseback
Total Metals Segment
Specialty Chemicals Segment
Gain on sale-leaseback
Total Specialty Chemicals Segment
Unallocated corporate expenses
Earn-out adjustments
Acquisition related costs
Operating (loss) income
Interest expense
Change in fair value of interest rate swap
Other income, net
(Loss) income before income taxes
Identifiable assets
Metals Segment
Specialty Chemicals Segment
Corporate
Depreciation and amortization
Metals Segment
Specialty Chemicals Segment
Corporate
Capital expenditures
Metals Segment
Specialty Chemicals Segment
Corporate
Sales by product group
Specialty chemicals
Stainless steel pipe and tube
Heavy wall seamless carbon steel pipe and tube
Fiberglass and steel liquid storage tanks and separation equipment
Galvanized pipe and tube
Geographic sales
United States
Elsewhere
57
2019
2018
2017
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
251,078
54,090
305,168
3,692
—
3,692
2,811
—
2,811
6,503
8,357
(747)
601
(1,708)
3,818
141
(1,904)
(3,763) $
186,758
25,428
45,011
257,197
9,439
1,461
164
11,064
2,812
1,157
568
4,537
54,090
167,907
30,607
28,722
23,842
305,168
297,808
7,360
305,168
$
$
$
$
$
$
$
$
$
$
222,242
58,599
280,841
27,544
240
27,784
3,879
95
3,974
31,758
7,878
1,431
1,212
21,237
2,211
(20)
2,573
16,473
192,196
28,175
8,028
228,399
7,198
1,428
149
8,775
5,969
1,298
88
7,355
58,599
146,237
32,474
31,654
11,877
280,841
273,244
7,597
280,841
$
$
$
$
$
$
$
$
$
$
$
$
152,957
48,191
201,148
5,424
240
5,664
4,295
95
4,390
10,054
6,513
689
795
2,057
985
(96)
(310)
1,478
6,281
1,302
155
7,738
3,406
1,650
223
5,279
48,191
100,254
25,103
27,600
—
201,148
196,172
4,976
201,148
Note 14: Interest Rate Swap
The Company has an interest rate swap associated with its current credit facility which effectively is expected to offset variable
interest in the borrowing; hedge accounting was not utilized. The notional amount of the swap was $6.0 million and $8.25 million
at December 31, 2019 and December 31, 2018, respectively. The fair value is recorded in current assets or liabilities, as appropriate,
with corresponding changes to fair value recorded to other income (expense). The interest rate swap will remain in place for the
remainder of the current credit facility's term. The Company recorded an asset of $6,088 and $0.1 million for the fair value of the
swap at December 31, 2019 and December 31, 2018, respectively.
Note 15: Acquisitions
Acquisition of the Assets and Operations of American Stainless Tubing, Inc.
On January 1, 2019, ASTI completed the American Stainless acquisition. The purchase price for the all-cash acquisition was $21.9
million, subject to a post-closing working capital adjustment. The Company funded the acquisition with a new five-year $20
million term note and a draw against asset-based line of credit (see Note 5).
The transaction is accounted for using the acquisition method of accounting for business combinations. Under this method, the
total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired
and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of
accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible
and intangible assets acquired and liabilities assumed. During the third quarter of 2019, the Company finalized the purchase price
allocation for the American Stainless acquisition.
The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is reflected as
goodwill. Goodwill consists of manufacturing cost synergies expected from combining American Stainless' production capabilities
with the Metals Segment current operations. All of the goodwill recognized was assigned to the Company's Metals Segment and
is expected to be deductible for income tax purposes.
American Stainless will receive quarterly earn-out payments for a period of three years following closing. Pursuant to the asset
purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent)
of ASTI’s revenue over the three-year earn-out period. In determining the appropriate discount rate to apply to the contingent
payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-
out were all considered. The fair value of the contingent consideration was estimated by applying the probability weighted expected
return method using management's estimates of pounds to be shipped and future price per unit.
During the second quarter of 2019, management identified circumstances that existed on the date of acquisition and as a result,
revised the purchase price allocation of certain acquired assets and liabilities as allowable during the measurement period.
The following table shows the initial estimate of value and revisions made during 2019:
(in thousands)
Inventories
Accounts receivable
Other current assets - production and maintenance supplies
Property, plant and equipment
Customer list intangible
Goodwill
Contingent consideration (earn-out liability)
Accounts payable
Other liabilities
Initial
estimate
Revisions
Final
$
$
5,564
3,534
605
2,793
10,000
7,044
(6,148)
(1,400)
(97)
21,895
$
$
— $
—
—
—
(496)
714
(218)
—
—
— $
5,564
3,534
605
2,793
9,504
7,758
(6,366)
(1,400)
(97)
21,895
58
ASTI's results of operations since acquisition are reflected in the Company's consolidated statements of operations as follows:
(in thousands)
Net sales
Income before income taxes
$
2019
34,477
2,690
For the year ended December 31, 2019, cost of sales included $1.1 million representing the fair value above predecessor cost
associated with acquired inventory that was sold during the year ended December 31, 2019.
The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's
operations with ASTI as if the acquisition had occurred on January 1, 2018. The unaudited pro-forma financial information is for
information purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed
on the date indicated above.
Pro-Forma (Unaudited)
(in thousands, except per share data)
Pro-forma net sales
Pro-forma net income
Earnings per share:
Basic
Diluted
2018
316,734
13,420
1.52
1.51
$
$
$
$
Pro-forma net income was reduced for the following:
• Amortization of American Stainless’ customer list intangible of $1.2 million for the year ended December 31, 2018 ;
• Additional rent expense related to the Company’s lease of American Stainless’ real estate from Store Capital of $0.5
million for the year ended December 31, 2018;
• An estimated amount of interest expense associated with the additional borrowings to fund the American Stainless
acquisition of $0.8 million for the year ended December 31, 2018;
• Depreciation of $0.2 million for the year ended December 31, 2018, related to the incremental fair value above historical
cost for acquired property, plant and equipment; and
• An increase in the provision for income taxes of $0.1 million for the year ended December 31, 2018 related to the impact
of the other pro-forma adjustments and American Stainless' previous status as a pass-through entity for income tax
purposes prior to the acquisition.
Acquisition of the Galvanized Pipe and Tube Assets of Marcegaglia USA, Inc.
On July 1, 2018, BRISMET completed the MUSA-Galvanized acquisition. The purpose of the transaction was to enhance the
Company's on-going business with additional capacity and technological advantages. The transaction was funded through an
increase to the Company's current credit facility (refer to Note 5). The purchase price for the transaction totaled $10.4 million.
The tangible assets purchased and liabilities assumed from MUSA include accounts receivable, inventory, equipment, and accounts
payable.
MUSA will receive quarterly earn-out payments for a period of four years following closing. Earn-out payments will equate to
three percent of BRISMET’s galvanized steel pipe and tube revenue. As of July 1, 2018, the Company forecasted earn-out payments
to be $4.2 million, for which the Company established a fair value of $3.8 million using a probability-weighted expected return
method and a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate to apply to
the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment
of the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the probability-
weighted expected return method using management's estimates of pounds to be shipped and future price per unit. At December
31, 2018 the fair value of the earn-out totaled $3.4 million with $1.0 million of this liability classified as a current liability because
the payments will be made quarterly.
In the fourth quarter of 2018, management adjusted the fair value of the customer list intangible asset. Because this adjustment
was determined within the measurement period, the customer list intangible was decreased by $0.3 million and goodwill was
59
increased by $0.3 million. Goodwill arising from the MUSA-Galvanized transaction increased from $3.5 million to $3.8
million and the fair value of the customer list intangible asset was decreased from $1.4 million to $1.2 million. All other changes
in fair value have been included as earn-out adjustments in the Company's consolidated statements of operations.
The total purchase price was allocated to the acquired net tangible and identifiable intangible assets based on their estimated fair
values as of July 1, 2018. The fair value assigned to the customer list intangible is being amortized on an accelerated basis over
15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is
reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining Munhall-Galvanized's
production capabilities with BRISMET's current operations. All of the goodwill recognized was assigned to the Company's Metals
Segment and is expected to be deductible for income tax purposes. During the fourth quarter of 2018, the Company finalized the
purchase price allocation for the MUSA-Galvanized acquisition.
The following table shows the initial estimate of value and revisions made during 2018:
(in thousands)
Inventories
Accounts Receivable
Other current assets - production and maintenance supplies
Property, plant and equipment
Customer list intangible
Goodwill
Earn-out Liability
Accounts payable
Other liabilities
Initial
estimate
Revisions
Final
$
$
2,746
2,187
747
4,883
1,424
3,545
(3,800)
(1,051)
(303)
10,378
$
$
—
—
—
—
(251)
251
—
—
—
— $
2,746
2,187
747
4,883
1,173
3,796
(3,800)
(1,051)
(303)
10,378
MUSA-Galvanized's results of operations since acquisition are reflected in the Company's consolidated statements of operations
as follows:
(in thousands)
Net sales
Income before income taxes
2018
$
11,877
65
The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's
operations with Munhall-Galvanized as if the acquisition had occurred on January 1, 2017. The unaudited pro-forma financial
information is for information purposes only and is not necessarily indicative of what the results would have been had the acquisition
been completed on the date indicated above.
Pro-Forma (Unaudited)
(in thousands, except per share data)
Pro-forma net sales
Pro-forma net income (loss)
Earnings (loss) per share:
Basic
Diluted
2018
292,793
11,920
$
$
1.35
1.34
2017
225,376
21
n/a
n/a
$
$
$
$
The 2018 pro-forma calculation excludes non-recurring acquisition costs of $0.7 million that were incurred by the Company during
2018. Munhall-Galvanized's historical financial results were adjusted for both years to eliminate interest expense charged by the
prior owner. Pro-forma net income was reduced for both years for the amount of amortization on Munhall-Galvanized's customer
list intangible and an estimated amount of interest expense associated with the additional line of credit borrowings.
60
Acquisition of the Stainless Steel Pipe and Tube Assets of Marcegaglia USA, Inc.
On February 28, 2017, BRISMET completed the MUSA-Stainless acquisition. The Company funded the transaction through an
increase to the Company's credit facility (See Note 5). The purchase price for the transaction, which excluded real estate and
certain other assets, totaled $15.0 million. The assets purchased from MUSA included inventory, production and maintenance
supplies and equipment less specific identified liabilities assumed. In accordance with the agreement, on December 9, 2016,
BRISMET entered into an escrow agreement and deposited $3.0 million into the escrow fund. The deposit was remitted to MUSA
at the close of the transaction and was reflected as a credit against the purchase price.
The transaction was accounted for using the acquisition method of accounting for business combinations. During the fourth quarter
of 2017, the Company finalized the purchase price allocation for the MUSA-Stainless acquisition.
MUSA will receive quarterly earn-out payments for a period of four years following closing. Aggregate earn-out payments will
be at least $3.0 million, with no maximum. Actual payouts will equate to three percent of BRISMET’s incremental revenue, if
any, from the amount of small diameter stainless steel pipe and tube (outside diameter of 10 inches or less) sold. At February 28,
2017, the acquisition date, the Company forecasted earn-out payments to be $4.1 million, which was discounted to a present value
of $3.6 million using a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate to
apply to the contingent payments, the risk associated with the functional form of the earn-out, the credit risk associated with the
payment of the earn-out and the methodology to quantify the earn-out were all considered. The fair value of the contingent
consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped.
In the second quarter of 2017, management adjusted the selling price used in the earn-out calculation associated with the MUSA-
Stainless acquisition. Since this adjustment was determined within the measurement period, the beginning earn-out liability and
goodwill were increased by $1.1 million. Goodwill related to the MUSA-Stainless acquisition increased from $3.6 million to $4.6
million and the fair value of contingent consideration was increased from $3.6 million to $4.7 million. All other changes in fair
value have been included as earn-out adjustments in the Company's consolidated statements of operations.
The total purchase price was allocated to Munhall-Stainless' net tangible and identifiable intangible assets based on their estimated
fair values as of February 28, 2017. The fair value assigned to the customer list intangible is being amortized on an accelerated
basis over 15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible
assets and liabilities is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining laser
mill capabilities acquired as part of Munhall-Stainless with BRISMET's current operations. All of the goodwill recognized was
assigned to the Company's Metals Segment and is expected to be deductible for income tax purposes.
The following table shows the initial estimate of value and revisions made during 2017:
(in thousands)
Inventories
Other current assets - production and maintenance supplies
Equipment
Customer list intangible
Goodwill
Earn-out liability
Other liabilities assumed
Initial
estimate
Revisions
Final
$
$
5,434
1,548
7,577
992
3,589
(3,604)
(583)
14,953
$
$
— $
—
—
—
1,059
(1,059)
—
— $
5,434
1,548
7,577
992
4,649
(4,664)
(583)
14,953
Munhall-Stainless' results of operations since acquisition are reflected in the Company's consolidated statements of operations.
The amount of Munhall-Stainless' revenues and operating loss included in the consolidated statements of operations for the year
ended December 31, 2017 was $25.8 million and $0.2 million, respectively.
On March 1, 2017, pursuant to the terms and conditions of the MUSA-Stainless asset purchase agreement, the Company entered
into a lease agreement to lease manufacturing and warehouse space at MUSA's Munhall, PA facility for $33,333 per month for
the initial lease term of 15 months. In February 2018, the lease was amended to extend the term of the lease for the period beginning
June 1, 2018 and ending May 31, 2023 and includes escalating rent payments. The lease met the operating lease requirements and
was accounted for as such in 2017.
As part of the MUSA-Galvanized acquisition that occurred on July 1, 2018, the Company amended and restated the Master Lease,
effective June 29, 2018, pursuant to which the Company leased the Munhall, PA facility, purchased by Store Funding from MUSA
for the remainder of the initial term of 20 years set forth in the Master Lease (see Note 10).
61
Note 16: Shareholders Equity
Stock Repurchase Program
On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding
common stock over twenty-four months. The shares will be purchased from time to time at prevailing market prices, through open
market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded
from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of
common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company,
and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.
During the year-ended December 31, 2019 the Company did not purchase any shares under the stock repurchase program.
At the Market Offering
On August 9, 2018, the Company entered into an Equity Distribution Agreement pursuant to which the Company had the ability
to issue and sell, from time to time, shares of the Company’s common stock (the "Shares"), par value $1.00 per share, with aggregate
gross sales proceeds of up to $10 million, through an “at-the-market” equity offering program under which BB&T Capital Markets,
a division of BB&T Securities, LLC and Ladenburg Thalmann & Co. Inc. (the "Agents") were sales agents (the “ATM Program”).
In 2018, the Company issued and sold 44,378 shares in connection with the ATM Program, with total net proceeds of $1.0 million.
The Agents received $20,470 in commission on the sales.
On November 16, 2018, the Company terminated the ATM Program. The Company has not sold any shares under the ATM Offering
since September 30, 2018, and will no longer offer any shares under this program.
Dividends
At the end of each fiscal year the Board reviews the financial performance and capital needed to support future growth to determine
the amount of cash dividend, if any, which is appropriate. In 2019, no dividends were declared or paid by the Company. In 2018,
the Company paid a $0.25 cash dividend on December 12, 2018 for a total of $2.3 million. In 2017, the Company paid a $0.13
cash dividend totaling $1.1 million.
Note 17: Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which
were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic
606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under
Topic 605. The Company operates as a manufacturer of various products, and revenue is comprised of short-term contracts with
point-in-time performance obligations. As a result, the Company did not identify any differences in its recognition of revenue
between Topic 606 and Topic 605. Accordingly, there was no adjustment required to opening retained earnings for the cumulative
impact of adopting Topic 606 and no impact to revenues for the year-ended December 31, 2018 as a result of applying Topic 606.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an
amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents the Company's revenues, disaggregated by product group. Substantially all of the Company's revenues
are derived from contracts with customers where performance obligations are satisfied at a point-in-time.
(in thousands)
Fiberglass and steel liquid storage tanks and separation equipment
Heavy wall seamless carbon steel pipe and tube
Stainless steel pipe and tube
Galvanized pipe and tube
Specialty chemicals
Net sales
62
2019
28,722
30,607
167,907
23,842
54,090
305,168
$
$
December 31,
2018
$
$
31,654
32,474
146,237
11,877
58,599
280,841
$
$
2017
27,600
25,103
100,254
—
48,191
201,148
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance
obligation is based on its stand-alone selling price and revenue is recognized as each performance obligation is satisfied. The
Company generally determines stand-alone selling prices based on the prices charged to customers using the adjusted market
assessment approach or expected cost plus margin.
Deferred Revenues
Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including
amounts which are refundable. The deferred revenue balance decreased less than $0.1 million during 2019 to $0.2 million as of
December 31, 2019 due to receiving $2.4 million in advance of satisfying our performance obligations during the period, offset
by $2.4 million of revenue that was recognized during the period after satisfying the performance obligations that were included
in the beginning deferred revenue balance or received during the current period. Deferred revenues are included in "Accrued
expenses" on the accompanying Consolidated Balance Sheets.
Our payment terms vary by the financial strength or location of our customer and the products offered. The length of time between
invoicing and when payment is due is not significant. For certain customers, payment is required before the products or services
are delivered to the customer.
Practical Expedients and Election
When shipping and handling activities are performed after a customer obtains control of goods, the Company reflects shipping
and handling activities as part of satisfying the obligation of providing goods to the customer. In some instances, the Company
withholds various states' sales taxes upon shipments into those states. Accordingly, management makes an accounting policy
election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed
on and concurrent with a specific revenue-producing transaction and collected from a customer. The Company expenses sales
commissions when incurred because the amortization period would have been one year or less. These costs are recorded within
selling, general, and administrative expenses.
The Company does not disclose the value of unsatisfied performance obligations since contracts are expected to be completed
within one year.
63
Note 18: Quarterly Results (Unaudited)
The following is a summary of quarterly operations for 2019 and 2018:
(in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2019
Net sales
Gross profit
Net (loss)
Per common share(1)
Basic
Diluted
2018
Net sales
Gross profit
Net income
Per common share(1)
Basic
Diluted
$
84,804
$
78,778
$
73,640
$
67,946
8,684
(927)
7,838
(263)
7,288
(953)
6,963
(893)
(0.10)
(0.10)
(0.03)
(0.03)
(0.11)
(0.11)
(0.10)
(0.10)
$
58,480
$
71,894
$
77,793
$
11,234
3,835
15,716
3,677
14,028
5,036
72,674
10,259
549
0.44
0.44
0.42
0.41
0.57
0.56
0.06
0.06
(1) Per Share amounts may not foot due to rounding.
Note 19: Subsequent Events
On February 5, 2020 the Compensation Committee approved stock option grants under the 2011 Plan. Options for a total
of 123,500 shares, with an exercise price of $12.995 per share, were granted under the 2011 Plan to certain management
employees of the Company. The stock options will vest in 33 percent increments annually on a cumulative basis, beginning one
year after the date of grant. In order for the options to vest, the employee must be in the continuous employment of the
Company since the date of the grant. Except for death, disability, or qualifying retirement, any portion of the grant that has not
vested will be forfeited upon termination of employment. The Company may terminate any portion of the grant that has not
vested upon an employee's failure to comply with all conditions of the award or the 2011 Plan. Shares representing grants that
have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect
to any shares not yet vested, and the shares are not transferable. The per share weighted-average fair value of this stock option
grant was $4.53. The Black-Scholes model for this grant was based on a risk-free interest rate of 1.66 percent, an expected life
of ten years, an expected volatility of 35.1 percent and a dividend yield of 1.79 percent. Compensation expense totaling $0.6
million will be recorded against earnings equally over the following 36 months from the date of grant with the offset recorded
in Shareholders' Equity.
On February 5, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to
certain management employees of the Company where 45,418 shares with a market price of $12.995 per share were granted
under the Plan. The stock awards vest in either 20 percent or 33 percent increments annually on a cumulative basis,
beginning one year after the date of grant. In order for the awards to vest, the employee must be in the continuous employment
of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that
has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not
vested upon an employee's failure to comply with all conditions of the award or the 2015 Stock Awards Plan. An employee is
not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
On February 5, 2020, the Compensation Committee approved performance-based restricted stock awards to certain
management employees of the Company where 36,647 shares with a market price of $12.995 per share were granted under the
Plan. The Company's performance-based restricted stock awards are classified as equity and contain performance and service
64
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
conditions that must be satisfied for an employee to earn the right to benefit from the award. The performance condition is
based on the achievement of the Company's EBITDA targets. The fair value of the performance-based restricted stock awards
are determined based on the closing market price of our stock on the date of grant. In general, 0% to 150% of the Company's
performance-based restricted stock awards vest at the end of a three year service period from the date of grant based upon
achievement of the performance condition specified. Except for death, disability, or qualifying retirement, any portion of an
award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award
that has not vested upon an employee's failure to comply with all conditions of the award. An employee is not entitled to any
voting rights with respect to any shares not yet vested, and the shares are not transferable.
65
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the
Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), as amended. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of the end of December 31, 2019. There have been no significant
changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to
the date the Company completed the evaluation.
Item 9B Other Information
Not applicable.
PART III
Item 10 Directors, Executive Officers and Corporate Governance
In accordance with General Instruction G(3), information called for by Part III, Item 10, is incorporated herein by reference from
the information appearing under the caption "Proposal 1 - Election of Directors," "Executive Officers," and "Section 16(a) Beneficial
Ownership Reporting Compliance” in the definitive Proxy Statement for the 2020 Annual Meeting of Shareholders, which definitive
Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Code of Conduct. The Company's Board of Directors has adopted a Code of Conduct that applies to the Company's Chief Executive
Officer, Chief Financial Officer and corporate and divisional controllers. The Code of Conduct is available on the Company's
website at www.synalloy.com. Any amendment to, or waiver from, this Code of Conduct will be posted on the Company's website.
Audit Committee. The Company has a separately designated standing Audit Committee of the Board of Directors established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Anthony
A. Callander, Henry L. Guy, Jeffrey Kaczka and James W. Terry.
Audit Committee Financial Expert. The Company's Board of Directors has determined that the Company has at least one "audit
committee financial expert," as that term is defined by Item 407(d)(5) of Regulation S-K promulgated by the Securities and
Exchange Commission, serving on its Audit Committee. Mr. Anthony A. Callander meets the terms of the definition and is
independent, as independence is defined for audit committee members in the rules of the NASDAQ Global Market. Pursuant to
the terms of Item 407(d) of Regulation S-K, a person who is determined to be an "audit committee financial expert" will not be
deemed an expert for any purpose as a result of being designated or identified as an "audit committee financial expert" pursuant
to Item 407(d), and such designation or identification does not impose on such person any duties, obligations or liability that are
greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and Board of Directors
in the absence of such designation or identification. Further, the designation or identification of a person as an "audit committee
financial expert" pursuant to Item 407(d) does not affect the duties, obligations or liability of any other member of the Audit
Committee or Board of Directors.
Item 11 Executive Compensation
In accordance with General Instruction G(3), information called for by Part III, Item 11, is incorporated herein by reference from
the information appearing under the caption "Board of Directors and Committees - Compensation Committee Interlocks and
Insider Participation," "Director Compensation," "Discussion of Executive Compensation" and "Compensation Committee Report"
in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed
electronically with the SEC pursuant to Regulation 14A.
66
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
In accordance with General Instruction G(3), information called for by Part III, Item 12, is incorporated by reference from the
information appearing under the caption "Beneficial Owners of More Than Five Percent of the Company's Common Stock" and
"Security Ownership of Certain Beneficial Owners and Management" in the definitive Proxy Statement for the 2020 Annual
Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Equity Compensation Plan Information. The following table sets forth aggregated information as of December 31, 2019 about
all of the Company's equity compensation plans.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted
average
exercise price of
outstanding
options,
warrants and
rights
(b)
51,746
$
—
14.38
—
14.38
Total
(1) Represents shares remaining available for issuance under the 2015 Stock Awards Plan and the 2011 Plan.
51,746
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)) (1)
(c)
215,823
—
215,823
Non-employee directors are paid an annual retainer of $102,000, and each director has the opportunity to elect to receive 100
percent of the retainer in restricted stock. For 2019, non-employee directors received an aggregate of $304,000 of the annual
retainer in restricted stock. The number of restricted shares is determined by the average of the high and low sale price of the
Company's stock on the day prior to the Annual Meeting of Shareholders. For 2019, seven non-employee directors each received
an aggregate of 15,909 shares. Issuance of the shares granted to the directors is not registered under the Securities Act of 1933
and the shares are subject to forfeiture in whole or in part upon the occurrence of certain events. The above table does not reflect
these shares issued to non-employee directors.
Item 13 Certain Relationships and Related Transactions, and Director Independence
In accordance with General Instruction G(3), information called for by Part III, Item 13, is incorporated by reference from the
information appearing under the caption "Board of Directors and Committees – Related Party Transactions" and "– Director
Independence" in the definitive Proxy Statement for the 2020 Annual Meeting of Shareholders, which definitive Proxy Statement
will be filed electronically with the SEC pursuant to Regulation 14A.
Item 14 Principal Accounting Fees and Services
In accordance with General Instruction G(3), information called for by Part III, Item 14, is incorporated by reference from the
information appearing under the caption "Independent Registered Public Accounting Firm - Fees Paid to Independent Registered
Public Accounting Firm" and "– Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm" in the definitive Proxy Statement for the 2020 Annual Meeting of Shareholders, which
definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
67
PART IV
Item 15 Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this report:
1. Financial Statements: The following consolidated financial statements of Synalloy Corporation are included in Part
II, Item 8:
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2019, 2018
and 2017
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
2. Financial Statements Schedules: The following consolidated financial statements schedule of Synalloy Corporation is
included in Item 15:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. Listing of Exhibits:
See "Exhibit Index"
68
Item 16 Form 10-K Summary
None.
Schedule II Valuation and Qualifying Accounts
(in thousands)
Year ended December 31, 2019
Deducted from asset account:
Inventory reserves
Year ended December 31, 2018
Deducted from asset account:
Inventory reserves
Year ended December 31, 2017
Deducted from asset account:
Inventory reserves
Balance at
Beginning of
Period
Charged to
(Reduction of)
Cost and
Expenses
Deductions
Balance at End
of Period
$
$
$
676
$
1,767
$
(1,696) $
747
697
$
1,828
$
(1,849) $
676
966
$
1,237
$
(1,506) $
697
69
Index to Exhibits
Exhibit No.
from
Item 601 of
Regulation S-K
Description
1.1 Underwriting Agreement dated September 24, 2013, incorporated by reference to Registrant's Form 8-K
filed September 24, 2013
1.2 Equity Distribution Agreement, dated August 9, 2018, between Synalloy Corporation and BB&T Capital
Markets, a division of BB&T Securities, LLC, and Ladenburg Thalmann & Co. Inc., incorporated by
reference to Registrant's Form 8-K filed August 10, 2018
3.1
Restated Certificate of Incorporation of Registrant, as amended, incorporated by reference to Registrant's
Form 10-Q for the period ended April 2, 2005
3.2 Restated Certificate of Incorporation of Registrant, as amended, incorporated by reference to Registrant's
Form 8-K filed May 18, 2015
3.3 Bylaws of Registrant, incorporated by reference to Registrant's Form 10-Q for the period ended March 31,
2001, as amended, which amendments are incorporated by reference to Registrant's Form 8-K filed
August 13, 2007
4.1 Form of Common Stock Certificate, incorporated by reference to Registrant's Form 10-Q for the period
ended March 31, 2001
10.1 Synalloy Corporation 2005 Stock Awards Plan, incorporated by reference to the Proxy Statement for the
2005 Annual Meeting of Shareholders
10.2 Amendment 1 to the Synalloy Corporation 2005 Stock Awards Plan, incorporated by reference to
Registrant's Form 10-K for the year ended December 29, 2007
10.3 Amendment 2 to the Synalloy Corporation 2005 Stock Awards Plan, incorporated by reference to
Registrant's Form 10-K for the year ended January 3, 2015
10.4 Synalloy Corporation 2015 Stock Awards Plan, incorporated by reference to the Proxy Statement for the
2015 Annual Meeting of Shareholders
10.5 Amended and Restated Synalloy Corporation 2015 Stock Awards Plan, incorporated by reference to
Registrant's Form 10-Q for the period ended June 30, 2018
10.6
2011 Long-Term Incentive Stock Option Plan, incorporated by reference to Registrant's Proxy Statement
for the 2011 Annual Meeting of Shareholders
10.7 Agreement between Registrant's Specialty Pipe & Tube, Inc. subsidiary and the United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union Local
4564-07, dated July 1, 2014, incorporated by reference to Registrant's Form 10-K for the year ended
January 3, 2015
10.8 Agreement between Registrant's Bristol Metals, LLC subsidiary and the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union Local 5852-22,
dated March 12, 2018, but effective January 6, 2018, incorporated by reference to Registrant's Form 10-K
for the year ended December 31, 2017
10.9 Second Amended and Restated Loan Agreement, dated as of August 31, 2016, between Registrant and
Branch Banking and Trust (“BB&T”), incorporated by reference to Registrant's Form 10-Q for the period
ended September 30, 2016
10.10 Third Amended and Restated Loan Agreement, dated as of October 30, 2017, between Registrant and
BB&T, incorporated by reference to Registrant's Form 10-Q for the period ended September 30, 2017
10.11 First Amendment to Third Amended and Restated Loan Agreement, dated as of June 29, 2018, between
Registrant and BB&T, incorporated by reference to Registrant's Form 10-Q for the period ended June 30,
2018
10.12 Second Amendment to Third Amended and Restated Loan Agreement, dated as of December 20, 2018,
between Registrant and BB&T, incorporated by reference to Registrant's Form 10-K for the period ended
December 31, 2018.
10.13 Employment Agreement, dated as of March 1, 2019, between Registrant and Craig C. Bram, incorporated
by reference to Registrant's Form 10-K for the period ended December 31, 2018.
10.14 Employment Agreement, dated as of March 1, 2019, between Registrant and Dennis M. Loughran,
incorporated by reference to Registrant's Form 10-K for the period ended December 31, 2018.
10.15 Employment Agreement, dated as of March 1, 2019, between Registrant and James G. Gibson,
incorporated by reference to Registrant's Form 10-K for the period ended December 31, 2018.
10.16 Stock Purchase Agreement, dated as of August 10, 2012, among Jimmie Dean Lee, James Varner, Steven
C. O'Brate and Registrant, incorporated by reference to Registrant's Form 8-K filed on August 24, 2012
70
10.17 Stock Purchase Agreement, dated as of November 21, 2014, between The Davidson Corporation and
Registrant, incorporated by reference to Registrant's Form 8-K filed on November 25, 2014
10.18 Asset Purchase Agreement, dated as of December 9, 2016, between Marcegaglia USA, Inc. and
Registrant's Bristol Metals, LLC subsidiary, incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 2016
10.19 Amendment No. 1 to Asset Purchase Agreement, dated as of February 28, 2017, between Marcegaglia
USA, Inc. and Registrant's Bristol Metals, LLC subsidiary, amending the Asset Purchase Agreement
between the parties dated December 9, 2016, incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 2016
10.20 Amendment No. 2 to Asset Purchase Agreement, dated as of July 1, 2018, between Marcegaglia USA,
Inc. and Registrant's Bristol Metals, LLC subsidiary, further amending the Asset Purchase Agreement
between the parties dated December 9, 2016, incorporated by reference to Registrant's Form 10-Q for the
period ended June 30, 2018
10.21 Asset Purchase Agreement, dated as of June 29, 2018, but with a closing effective date of July 1, 2018,
between Marcegaglia USA, Inc. and Registrant's Bristol Metals, LLC subsidiary, incorporated by
reference to Registrant's Form 10-Q for the period ended June 30, 2018
10.22 Asset Purchase Agreement, dated as of November 30, 2018, between American Stainless Tubing, Inc.
(now HLM Legacy Group, Inc.) and Registrant's ASTI Acquisition, LLC (now American Stainless
Tubing, LLC) subsidiary, incorporated by reference to Registrant's Form 10-K for the period ended
December 31, 2018.
10.23 Purchase and Sale Agreement, dated as of September 1, 2016, between Store Capital Acquisition, LLC
and Registrant's Bristol Metals, LLC, Specialty Pipe & Tube, Inc., Palmer of Texas Tanks, Inc.,
Manufacturers Soap & Chemical Company, Manufacturers Chemicals, LLC subsidiaries, and Registrant,
incorporated by reference to Registrant's Form 10-Q for the period ended September 30, 2016
10.24 Master Lease Agreement, dated as of September 30, 2016 between Registrant and Store Master Funding
XII, LLC, incorporated by reference to Registrant's Form 10-K for the year ended December 31, 2016
10.25 Purchase and Sale Agreement, dated as of May 25, 2018, between Marcegaglia USA, Inc. and Registrant's
Bristol Metals, LLC subsidiary, incorporated by reference to Registrant's Form 10-Q for the period ended
June 30, 2018
10.27 Agreement to Designate and Lease, dated as of June 29, 2018, between Registrant and Store Capital
Acquisitions, LLC, incorporated by reference to Registrant's Form 10-Q for the period ended June 30,
2018
10.27 Amended and Restated Master Lease Agreement, dated as of June 29, 2018, between Registrant and Store
Master Funding XII, LLC, incorporated by reference to Registrant's Form 10-Q for the period ended June
30, 2018
10.28 Purchase and Sale Agreement, dated as of November 30, 2018, between American Stainless Tubing, Inc.
(now HLM Legacy Group, Inc.) and Registrant's ASTI Acquisition, LLC (now American Stainless
Tubing, LLC) subsidiary, incorporated by reference to Registrant's Form 10-K for the period ended
December 31, 2018.
10.29 Amended and Restated Master Lease, dated as of January 1, 2019, between Registrant and Store Master
Funding XII, LLC, incorporated by reference to Registrant's Form 10-K for the period ended December
31, 2018.
10.30 Agreement between Registrant's Bristol Metals, LLC subsidiary and the United Steelworkers of America
Local 4586, dated August 1, 2019.
21 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP, independent registered public accounting firm
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32 Certifications Pursuant to 18 U.S.C. Section 1350
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on
Form 10-K shall be deemed "furnished" and not "filed."
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYNALLOY CORPORATION
By /s/ Craig C. Bram
Craig C. Bram
President and Chief Executive Officer
(principal executive officer)
March 6, 2020
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Murray H. Wright
Murray H. Wright
Chairman of the Board
/s/ Anthony A. Callander
Anthony A. Callander
Director
/s/ Amy J. Michtich
Amy J. Michtich
Director
/s/ James W. Terry, Jr.
James W. Terry, Jr.
Director
/s/ Henry L. Guy
Henry L. Guy
Director
/s/ Susan S. Gayner
Susan S. Gayner
Director
/s/ Jeffrey Kaczka
Jeffrey Kaczka
Director
/s/ Craig C. Bram
Craig C. Bram
Chief Executive Officer and Director
/s/ Dennis M. Loughran
Dennis M. Loughran
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
March 6, 2020
Date
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