UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
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 or other jurisdiction of incorporation or
organization)
4510 Cox Road, Suite 201,
Richmond, Virginia
(Address of principal executive offices)
57-0426694
(I.R.S. Employer Identification No.)
23060
(Zip Code)
(804) 822-3260
(Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $1.00 per share
Trading Symbol
SYNL
Name of exchange on which registered
NASDAQ Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No x
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 x
Securities registered pursuant to Section 12(g) of the Act: None
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 x 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 x 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
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Accelerated filer
Smaller reporting company
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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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
Based on the closing price as of June 30, 2020, 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 $38.9 million.
The number of shares outstanding of the registrant's common stock as of March 8, 2021 was 9,202,045.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2021 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.
Part I
Part II
Part III
Part IV
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Synalloy Corporation
Form 10-K
For Period Ended December 31, 2020
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
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 and Financial Statement Schedules
Form 10-K Summary
Signatures
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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, including risks
relating to the impact and spread of and the government’s response to COVID-19; inability to weather an economic downturn; a prolonged decrease in
nickel and oil prices; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw
materials availability; financial stability of our customers; customer delays or difficulties in the production of products; loss of consumer or investor
confidence; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; risks associated with mergers, acquisitions,
dispositions and other expansion activities; environmental issues; negative or unexpected results from tax law changes; inability to comply with covenants
and ratios required by our debt financing arrangements; 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.
Item 1. Business
PART I
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 pipe and tube, 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 serves markets through
the master distribution of pipe and tube and customers in the appliance, architectural, automotive and commercial transportation, brewery, chemical,
petrochemical, pulp and paper, mining, power generation (including nuclear), water and waste-water treatment, liquid natural gas ("LNG"), food
processing, pharmaceutical, oil and gas 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"). 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 Specialty Chemicals Segment produces specialty chemicals for the chemical, pulp and paper, coatings, adhesives, sealants and
elastomers (CASE), textile, automotive, household, industrial and institutional, water and waste-water treatment, construction, oil and gas and other
industries.
General
Metals Segment – The 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.
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BRISMET manufactures welded pipe and tube, primarily from stainless steel, duplex, and nickel alloys. Pipe is produced in sizes from 3/8 inch outside
diameter to 144 inches outside diameter and inner dimension wall thickness from 0.28 inches up to 1 and 3/8 inches. Pipe smaller than 18 inches in
diameter 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. BRISMET also has capabilities in the production of long
length pipe without circumferential welds. This can reduce the installation cost 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.
BRISMET's Munhall facility manufactures stainless welded pipe as well as new product offerings in welded tube in diameters from 5/8 inch to five inches
and gauges from 0.028 inch to 1/4 inch. Additionally, the Munhall facility produces galvanized carbon tube in custom sizes.
ASTI is a leading manufacturer of high-end ornamental stainless steel tube, 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 our 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
1/2 inch outside diameter to 5 inch outside diameter, 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 tube, 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 includes 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.
The Metals Segment relies on 10 suppliers that furnish approximately 95 percent of total dollar purchases of raw materials and one supplier that furnishes
33 percent of material purchases. 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 – The 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. The 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 manufacturing. 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.
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MC's strategy has been to focus on industries and markets that have strong 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. MC
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.
CRI Tolling's business and strategy has been focused in toll manufacturing and providing services to many different end markets, such as the agrochemical,
automotive, urethane, water treatment and coatings industries. CRI Tolling engages in sales efforts to other chemical companies in a wide array of markets
through the use of its own sales force, manufacturer's representatives and through internal sales efforts involving staff interaction.
The Specialty Chemicals Segment maintains two laboratories for applied research and quality control which are staffed by 11 employees, including
multiple chemists.
The majority of raw materials used by the segment are available from numerous independent suppliers and approximately 48 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 14 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
Metals Segment – The Metals Segment utilizes separate sales organizations for its different product groups. Welded Pipe & Tube Operations include
stainless steel and galvanized 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. Specialty includes the distribution of hot finish, seamless, carbon steel pipe and tube, with approximately 80
percent of Specialty's pipe and tube sales to North American pipe and tube distributors. Producing sales and providing service to distributors, OEM and end
use customers are 44 sales representatives comprised of inside sales employees, outside sales employees and independent manufacturers' representatives.
Customer feedback and in-field experience generate product enhancements and new product development.
There were no customers representing more than 10 percent of the Metals Segment's revenues for 2020 or 2019, respectively.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by 10 sales representatives comprised of outside
sales employees and independent manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted for approximately 16
percent of the segment's revenues for 2020 and 2019, respectively.
Distribution
Metals Segment – Welded Pipe & Tube Operations produce the largest sales volume group of products in the Metals Segment. For stainless steel and
galvanized pipe and tube, although information is not publicly available regarding the sales of the majority of other producers of these products,
management believes that the Company is one of the largest domestic producers of such pipe and tube. ASTI is a leading manufacturer of high-end
ornamental stainless steel tube, combining the use of superior metal quality with in-house capabilities in slitting and welding, along with our 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.
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.
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 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.
4
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 business segments and geographic footprint or establish new
manufacturing capabilities.
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 tube. The purchase price was $21.9
million. American Stainless will also receive quarterly earn-out payments based on ASTI's revenue for a period of three years following closing. The
tangible assets purchased and liabilities assumed from American Stainless included 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.
Seasonality
The Company's businesses and products are generally not subject to seasonal impacts that result in significant variations in revenues from one quarter to
another.
Backlogs
The Metals Segment's Welded Pipe & Tube Operations and the Specialty Chemicals Segment incur a significant dollar value of committed orders in
advance of production. The backlog of open orders for the Welded Pipe & Tube Operations were $40.8 million and $35.4 million at the end of 2020 and
2019, respectively. The backlog of open orders for the Specialty Chemicals Segment were $3.9 million and $1.5 million at the end of 2020 and 2019,
respectively. Our backlog may not be indicative of actual sales and, therefore, should not be used as a direct measure of future revenue.
Human Capital
Safety and Wellness
The health and safety of our workforce is fundamental to the success of our business. We provide our employees upfront and ongoing safety training to
ensure that safety policies and procedures are effectively communicated and implemented. Personal protective equipment is provided to employees to
safely perform their job responsibilities.
Because our business involves the manufacturing of physical products, many of our employees are unable to work from home. In an effort to keep our
employees safe and maintain operations during the COVID-19 pandemic, we have implemented new health-related measures, including social distancing,
restrictions on visitors to our facilities, limiting in-person meetings and other gatherings, limiting company travel, increasing cleanings of our facilities and
providing personal protective equipment and disinfecting agents to employees.
5
Talent Management
Our approach to human capital management is one that seeks to foster an inclusive and respectful work environment where employees are empowered at
all levels to implement new ideas, to better serve our customers and continuously improve our processes and operations. Our business results depend on our
ability to manage our human capital resources, including attracting, identifying, and retaining key talent. Factors that may affect our ability to attract and
retain qualified employees include competition from other employers, availability of qualified individuals and opportunities for employee growth.
As of December 31, 2020, the Company had 526 employees. The Company considers relations with employees to be strong. The number of employees of
the Company represented by unions, located at the Munhall, Pennsylvania, Mineral Ridge, Ohio, and Bristol, Tennessee facilities, is 232, or 44 percent of
the Company's employees. They are represented by three locals affiliated with the United Steelworkers (the "USW"). Collective bargaining contracts for
the USW locals expire at various dates between 2023 and 2024.
Our voluntary turnover rate in 2020 was approximately three percent. We monitor employee turnover rates by plant and the Company as a whole. The
average tenure of our employees is approximately 10 years and we believe is driven by our competitive total rewards package offered to employees and
development opportunities which promotes longer employee tenure and reduces voluntary turnover.
Total Rewards
We invest in our workforce by offering a competitive total rewards package that includes a combination of salaries and wages, health and wellness benefits,
retirement benefits and educational benefits. We strive to offer competitive total rewards packages and benefits for eligible employees.
Diversity and Inclusion
We are an Equal Opportunity Employer and all qualified applicants for positions with the Company receive consideration for employment without regard
to race, color, religion, sex, sexual orientation, gender, identity, national origin, disability, or veteran status. We strive to provide an equitable and inclusive
environment for all our employees with representation across all levels of our workforce that reflects the diversity of the communities in which we live and
work.
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, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 and our consolidated financial statements and related notes in Item 8 below.
Industry and Segment Risks
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
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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.
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. Revenues from our Palmer and Specialty (Houston, Texas) units 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.
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 four 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.
Geographic, Trade and Customer Risks
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 in our Metals Segment. 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 government 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.
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.
There were no customers representing more than 10 percent of the Metals Segment's revenues in 2020 or 2019, respectively. 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.
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 in 2020 and 2019, respectively. The loss of this customer would have a material adverse effect on the
revenues of the Specialty Chemicals Segment and the Company.
7
Operations and Supply Chain Risks
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, 2020, 10
suppliers furnished approximately 95 percent of our total dollar purchases of raw materials, with one supplier providing 33 percent of purchases of raw
materials. 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 48 percent of total purchases were made from our top 10 suppliers during the year ended December 31, 2020. 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.
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. 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.
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 and a lengthy sales cycle which makes
it difficult to predict quarterly revenue levels and operating results.
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.
Purchasing the products of the Specialty Chemicals Segment is also 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.
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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.
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, 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. 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.
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.
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.
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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. 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 result in the market area for these products being 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.
Loss of key supplier authorizations or lack of product availability could adversely affect our sales and earnings.
Our Specialty 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.
Changes in supplier distribution programs could adversely affect sales and earnings in our Specialty business.
Specialty, as a master distributor, faces the risk of key product suppliers changing their relationships with distributors generally 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.
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. 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.
Government Regulation Risks
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:
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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.
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We have incurred, and expect to continue to incur, additional capital expenditures in addition to ordinary costs to comply with applicable environmental
laws. 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
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.
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.
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
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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.
Human Capital Risks
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, 2020, we had 232 employees represented by unions at our Bristol, Tennessee, Mineral Ridge, Ohio, and Munhall, Pennsylvania
facilities, which is 44 percent of the aggregate number of Company employees. These employees are represented by three local unions affiliated with the
USW. The collective bargaining contracts for the USW will expire at various dates between 2023 and 2024. 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.
If we do not successfully manage the transitions associated with the election of three new members of our Board of Directors, the appointment of a new
Chairman of the Board, the retirement of our Chief Executive Officer and appointment of a new Interim Chief Executive Officer and a new Chief
Financial Officer, it could have an adverse impact on our business operations, including our internal controls over financial reporting, as well as be
viewed negatively by our customers and shareholders.
The Company appointed Sally M. Cunningham Senior Vice President and Chief Financial Officer effective June 30, 2020 after the resignation of Dennis
M. Loughran. In addition, on July 7, 2020, the Company announced the election of three new members of the Board of Directors at the 2020 Annual
Meeting of Shareholders. On July 9, 2020, the Company's Board of Directors elected Henry L. Guy as Chairman of the Board of Directors. On October 27,
2020, the Company announced the retirement of Craig C. Bram, the Company's President and Chief Executive Officer and member of the Company's
Board of Directors, effective November 9, 2020. On October 27, 2020, the Company announced the appointment of Christopher G. Hutter, a member of the
Company's Board of Directors, as interim President and Chief Executive Officer, effective November 9, 2020. Such leadership transitions can be inherently
difficult to manage, and an inadequate transition may cause disruption to our business, including our relationships with customers, suppliers, vendors, and
employees. It may also make it more difficult to hire and retain key employees.
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 Christopher G. Hutter, Interim President and Chief Executive Officer and
Sally M. Cunningham, Senior Vice President and Chief Financial Officer, 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.
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Financial and Strategic Risks
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
as of December 31, 2020. 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.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.
On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR rates by the end of 2021. The discontinuation
date for submission and publication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month and 12-month) is currently under consultation
by the ICE Benchmark Administration and may be extended until June 2023. 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.
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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.
Impairment in the carrying value of our fixed assets, intangible assets, or goodwill could adversely affect our financial condition and consolidated
results of operations.
Goodwill represents the excess of cost over the fair value of identified net assets of businesses acquired. We review goodwill for impairment annually, or
whenever circumstances change in a way which could indicate that impairment may have occurred. Goodwill is tested at the reporting unit level. We
identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other
intangible assets. If the carrying amount of the reporting unit exceeds the fair value, an impairment exists. The amount of the impairment is the amount by
which the carrying amount exceeds the fair value. A significant amount of judgment is involved in determining if an indication of impairment exists.
Factors may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market
capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a
significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors would have a significant impact on the
recoverability of these assets and negatively affect our financial condition and consolidated results of operations. We are required to record a non-cash
impairment charge if the testing performed indicates that goodwill has been impaired.
We evaluate the useful lives of our fixed assets and intangible assets to determine if they are definite or indefinite-lived. Reaching a determination on useful
life requires significant judgments and assumptions regarding the lease term, future effects of obsolescence, demand, competition, other economic factors
(such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution
channels), the level of required maintenance expenditures and the expected lives of other related groups of assets. We cannot accurately predict the amount
and timing of any impairment of assets. Should the value of goodwill, fixed assets or intangible assets become impaired, there could be an adverse effect on
our financial condition and consolidated results of operations.
Intellectual Property Risks
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.
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General Risk Factors
Our business, financial condition, results of operations and cash flows may be adversely affected by global public health epidemics and pandemics,
including the COVID-19 outbreak.
Our business and operations expose us to risks associated with global health epidemics or pandemics, such as the outbreak of the coronavirus (COVID-19)
which has spread from China to many other countries including the United States. The outbreak has resulted in governments around the world
implementing increasingly stringent measures to help the control of the spread of the virus, including quarantines, "shelter in place" and "stay at home"
orders, travel restrictions, business curtailments, and school closures among others. The COVID-19 pandemic has significantly impacted the global
economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets and increased
unemployment levels leading to the Federal Reserve enacting fiscal and monetary stimulus measures to counteract the impacts of COVID-19 in the United
States.
We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Consistent with federal
guidelines and with state and local orders to date, we currently continue to operate across our business footprint. Notwithstanding our continued operations,
COVID-19 has begun to have and may have additional negative impacts on our operations and customers, which may compress our margins, including as a
result of preventative and precautionary measures that we, other businesses, and governments are taking. Any resulting economic downturn could adversely
affect the demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products
and raw materials. The continued progression of the outbreak could also negatively impact our business or results of operations through the temporary
closure or suspension of manufacturing operations at our operating locations or those of our customers or suppliers.
In addition, the ability of our employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, and as a result,
may impact our production throughout our supply chain and constrict sales channels. Our customers may be directly impacted by business curtailments or
weak market conditions and may not be able to fulfill their contractual obligations. Our bank credit agreement requires that we maintain certain financial
and other covenants. Events resulting from the effects of the COVID-19 outbreak may negatively affect our ability to comply with these covenants, which
could lead us to seek amendment or waivers from our lenders, limit access to or require accelerated repayment of our existing credit facilities, or require us
to pursue alternative financing arrangements. We have no assurance that any alternative financing arrangements, if required, could be obtained at
acceptable terms to us, or at all, given effects of the financial markets at such time.
The extent to which the COVID-19 outbreak may adversely affect our business depends on future developments, which are highly uncertain and
unpredictable, including new information about the severity of the outbreak and the effectiveness of actions to contain or mitigate its effects. As such, the
related financial impacts cannot be reasonably estimated at this time.
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 allowance for credit losses may not be adequate to cover actual losses.
An allowance for credit losses is 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
credit losses 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
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estimates. Although management believes that the allowance for credit losses is adequate to cover current estimated losses, management cannot make
assurances that we will not further increase the allowance for credit losses based on subsequent events and economic conditions. A significant increase in
the allowance for credit losses could adversely affect our earnings.
Our internal controls over financial reporting could fail to prevent or detect misstatements.
We are subject to Section 404 of The Sarbanes-Oxley Act of 2002 ("Section 404"), and the related rules of the SEC which generally require our
management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Section 404
requires an annual management assessment of the effectiveness of our internal control over financial reporting. Effective April 27, 2020, the SEC adopted
amendments to the "accelerated filer" and "large accelerated filer" definitions in Rule 12b-2 under the Securities and Exchange Act of 1934. The
amendments exclude from the "accelerated filer" and "large accelerated filer" definitions an issuer that is eligible to be a smaller reporting company and
that had a public float outstanding of less than $75 million as of the end of the registrant's most recent fiscal second quarter. We determined that the
Company does not meet the accelerated or large accelerated filer definitions as of June 30, 2020. For so long as we remain a smaller reporting company and
non-accelerated filer, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies,
including but not limited to, not being required as a non-accelerated filer to comply with the auditor attestation requirements of Section 404(b). An
independent assessment by our independent registered public accounting firm of the effectiveness of internal control over financial reporting could detect
problems our management's assessment may not. Undetected material weaknesses in our internal control over financial reporting could lead to financial
statement restatements and require us to incur the expense of remediation.
During the course of the review and testing of our internal control for the purpose of providing the reports required by these rules, we may identify
deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal
control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our
independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial
reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of
our stock to fall. In addition, as a public company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange
Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from the NASDAQ
Global Market or other adverse consequences that would materially harm our business.
In addition, if our status as a "non-accelerated filer" changes, we will be required to have our independent registered public accounting firm attest to the
effectiveness of internal control over financial reporting. If our independent registered public accounting firm is unable to express an opinion as to the
effectiveness of our internal control over financial reporting once we are an accelerated filer or large accelerated filer, investors may lose confidence in the
accuracy and completeness of our financial reports, and the market price of our common stock could be negatively affected.
Our business could be negatively affected as a result of actions of activist shareholders.
From time to time, we may be subject to proposals by shareholders urging us to take certain corporate actions. If activist shareholder activities ensue, our
business could be adversely impacted because (i) responding to actions by activist shareholders can be costly and time-consuming, and divert the attention
of our management and employees; (ii) perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may
make it more difficult to attract and retain qualified personnel and business partners; and (iii) pursuit of an activist shareholder's agenda may adversely
affect our ability to effectively implement our business strategy and create additional value for our shareholders.
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.
Item 1B. Unresolved Staff Comments
None.
16
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 11 to the consolidated financial statements included in Item 8 of this Form 10-K.
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
Building Square Feet
Principal Operations
Land Acres
Munhall, PA
Bristol, TN
Cleveland, TN
Fountain Inn, SC
Andrews, TX
Troutman, NC
Statesville, NC
Houston, TX
Mineral Ridge, OH
Mineral Ridge, OH
Richmond, VA
Spartanburg, SC
(1)
Manufacturing stainless steel pipe
Manufacturing stainless steel pipe
Chemical manufacturing and warehousing facilities
Chemical manufacturing and warehousing facilities
Manufacturing liquid storage solutions and separation equipment
Manufacturing ornamental stainless steel tube
Manufacturing ornamental stainless steel tube
Cutting facility and storage yard for heavy walled pipe
Cutting facility and storage yard for heavy walled pipe
Storage yard for heavy walled pipe
Corporate headquarters
Former office space for corporate employees and shared service center
(1)
284,000
275,000
143,000
136,834
122,662
106,657
83,000
29,821
12,000
—
5,911
4,858
20.0
73.1
18.8
16.9
19.6
26.5
26.8
10.0
12.0
4.6
—
—
Property leased by Company; office was closed in 2018 and all furniture and equipment have been removed.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see Note 12 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
17
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company had 393 common shareholders of record at March 8, 2021. 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 2020 or 2019. 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.
PART II
Quarter
1st
2nd
3rd
4th
2020
2019
High
Low
High
Low
$
14.25 $
10.60
8.48
8.14
8.33 $
6.51
5.52
3.81
16.80 $
19.65
17.17
16.02
12.45
14.00
15.28
11.45
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 12/31/15 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Source: Russell Investment Group
18
Comparison of 5 Year Cumulative Total Return Graph
Synalloy Corporation
Russell 2000
NASDAQ Non-Financial
12/15
12/16
12/17
12/18
12/19
12/20
$
100.00 $
100.00
100.00
159.16 $
121.31
107.53
196.49 $
139.08
141.01
247.02 $
123.76
137.21
192.23 $
155.35
187.89
116.14
186.36
276.01
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, in 2020, the Company issued an aggregate of 43,063 shares of restricted stock to non-employee directors
in lieu of $345,000 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 151,019 shares of common stock in 2020 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
The following table sets forth information with respect to purchases of the Company's common stock in fiscal 2020:
January 1, 2020 - January 31, 2020
February 1, 2020 - February 29, 2020
March 1, 2020 - March 31, 2020
Total
Total Number of
Shares Purchased
Average Price per
Share
— $
— $
59,617 $
59,617 $
—
—
10.65
10.65
Total Number of
Shares Purchased as
Part of Publicly
Announced
(1)
Program
Number of Shares
that may Yet Be
Purchased under the
Program
(1)
—
—
59,617
59,617
850,000
850,000
790,383
790,383
(1) Pursuant to the 850,000 share stock repurchase program authorized by the Board of Directors in February 2019. The stock repurchase program expires in 24 months from authorization, and there is no guarantee to the exact number of
shares that will be repurchased by the Company over that period. For additional information, see Note 16 in the notes to the consolidated financial statements included in Item 8 of this Form.
19
Item 6. Selected Financial Data
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Item 301(c) of Regulation S-K, we are not
required to provide the information required by this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity, and capital resources during the two-
year period ended December 31, 2020. Unless otherwise noted, all references herein for the years 2020 and 2019 represent the fiscal years ended
December 31, 2020 and 2019, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our
financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those
changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated
financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with
accounting principles generally accepted in the United States of America. This discussion and analysis is presented in five sections:
Business Overview
Results of Operations and Non-GAAP Financial Measures
Liquidity and Capital Resources
•
•
•
• Off-Balance Sheet Arrangements and Contractual Obligations
•
Significant Accounting Policies and Estimates
20
Business Overview
COVID-19 Update
The impact of COVID-19, including changes in consumer behavior, pandemic fears, and market downturns as well as restrictions on business and
individual activities has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions
taken by federal, state, and local public health and governmental authorities to contain the spread of COVID-19 and although many restrictions that were in
place have eased in many localities, some areas that had previously eased restrictions have reverted to more stringent limitations. If new strains of COVID-
19 develop or sufficient amounts of vaccines are not available or widely administered for a significant period of time, the continued impacts to our business
could continue to be material.
We are an essential business and remain open in all locations, adhering to the health guidelines to operate safely provided by our government officials and
the U.S. Centers for Disease Control and Prevention. Throughout the COVID-19 pandemic, our first priority has been to safeguard the health of our
employees. This includes restricting outside personnel and visitors as well as requiring a face covering when a visitor is on-site, creating space between
work areas for employees, providing ample PPE and cleaning supplies in our offices and manufacturing plants, restricting travel, and having formal
policies for mitigation in the event of cases of illness.
During 2020, COVID-19 has had an adverse effect on our reported results and operations. The Company has seen wide ranging impacts partially
attributable to COVID-19 that have included:
• A $16.2 million non-cash goodwill impairment charge related to our Metals Segment;
•
•
Continued curtailment of operations at our Palmer facility that has resulted in $4.0 million of operating losses and $6.2 million of non-cash, pre-
tax asset impairment charges related to that business; and
Technical defaults of our debt covenants in the second and third quarter of 2020 and the need to obtain waivers for compliance.
There remains significant uncertainty concerning the magnitude of the impact and the duration of the COVID-19 pandemic. We believe that, at a minimum,
the manufacturing sector will continue to face challenges over the next several quarters. Given that, we are unable to predict the ultimate impact it may
have on our business, future operations, financial position or cash flows. The extent that our operations will continue to be impacted by the COVID-19
pandemic will depend on future developments, including any new potential waves of the virus, new strains of the virus, and the success of vaccination
programs, all of which are highly uncertain and cannot be accurately predicted. See Part I - Item 1A, "Risk Factors," included herein for updates to our risk
factors regarding risks associated with the COVID-19 pandemic.
Goodwill Impairment
During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in
the Metals Segment existed. Continued deterioration in macroeconomic conditions, continued risks within the stainless steel industrial business, reporting
unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a
triggering event, thereby requiring the Company to quantitatively evaluate the reporting unit for impairment. As a result of the goodwill impairment
evaluation in the second quarter, it was concluded that the estimated fair value of the reporting unit was greater than its carrying value by 1.7% and, as
such, no goodwill impairment was necessary.
During the third quarter of 2020, continued declines in the Company's stock price, reporting unit operating losses, and continued declines in the reporting
unit's net sales compared to forecast, collectively, indicated that the Welded Pipe and Tube reporting unit had experienced a triggering event resulting in the
Company performing another quantitative interim evaluation of goodwill. As a result of the goodwill impairment evaluation in the third quarter, it was
concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 9.7% resulting in a goodwill impairment
charge of $10.7 million.
Further, continued risks within the stainless steel industrial business, reporting unit operating losses, and continued declines in the reporting unit's net sales
compared to forecast, collectively, indicated that the Welded Pipe and Tube reporting unit had experienced a triggering event in the fourth quarter of 2020,
resulting in the Company performing another quantitative interim evaluation of goodwill. As a result of the goodwill impairment evaluation in the fourth
quarter, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 24.1% resulting in the
remainder of the goodwill attributable to the Welded Pipe and Tube reporting unit being impaired and an additional goodwill impairment charge of
$5.5 million. See Note 5 - Goodwill for further discussion on the Company's goodwill and these impairment charges.
21
Results of Operations
Comparison of 2020 to 2019 – Consolidated
Consolidated net sales for the full-year 2020 decreased $49.2 million, or 16 percent, over the full-year 2019 to $256.0 million. Net sales for the fourth
quarter of 2020 decreased $12.0 million, or 18 percent, over the fourth quarter of 2019 to $55.9 million. The decrease in sales was driven by our Metals
Segment, which had a decrease of $46.6 million, or 19 percent, for the full-year of 2020 and a decrease of $10.6 million, or 19 percent, for the fourth
quarter of 2020.
For the full-year 2020, net loss totaled $27.3 million, or $3.00 diluted loss per share. This compared to full-year 2019 net loss of $3.0 million, or $0.34
diluted loss per share. The full-year 2020 was negatively impacted by:
• Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $16.2 million;
• Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges;
•
•
•
Proxy contest costs of $3.1 million related to the Company's proxy contest and election of directors at the 2020 Annual Meeting of Shareholders;
Costs related to the hotline investigation regarding the accounting for Palmer and other matters of $0.7 million; and
Severance costs of $1.1 million related to the retirement of the former President and CEO.
For the fourth quarter of 2020 the Company recorded a net loss of $8.6 million, or $0.94 diluted loss per share. This compares to a net loss of $0.9 million,
or $0.10 diluted loss per share for fourth quarter of 2019. The fourth quarter of 2020 was negatively impacted by:
• Non-cash goodwill impairment in our Welded Pipe and Tube reporting unit of $5.5 million;
• Operating losses at Palmer totaling $0.4 million; and
•
Severance costs of $1.1 million related to the retirement of the former President and CEO.
Full-year 2020 consolidated gross profit decreased 26 percent to $22.7 million, or nine percent of sales, compared to $30.8 million, or 10 percent of sales,
in the full-year 2019. For the fourth quarter of 2020, consolidated gross profit was $6.1 million, a decrease of 12 percent from the fourth quarter of 2019 of
$7.0 million. Consolidated gross profit was 11 percent of sales for the fourth quarter of 2020 and 10 percent of sales for the same period of 2019. The
decreases in dollars was attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2020 to 2019 below.
Consolidated selling, general and administrative expense for the full-year 2020 decreased by $3.9 million to $28.7 million, or 11 percent of sales, compared
to $32.6 million, or 11 percent of sales for the full-year 2019. These costs decreased $0.1 million during the fourth quarter of 2020 to $7.6 million
compared to $7.7 million for the same period of 2019 and were 14 percent of sales for the fourth quarter of 2020 compared to 11 percent of sales for the
fourth quarter of 2019. The Company experienced decreased SG&A costs for both the full year and fourth quarter of 2020 when compared to the same
periods of 2019 resulting from:
• Decreases in personnel costs related to salaries, commissions and employee benefits ($2.3 million lower for the full-year and $0.5 million lower
for the fourth quarter);
• Decreases in travel expense related to the Company's suspension of all non-essential travel in response to the COVID-19 pandemic ($0.9 million
lower for the full-year and $0.2 million lower for the fourth quarter); and
• Decreases in amortization expense due to the passage of time and write down of intangible assets in the second quarter of 2020 at Palmer ($0.5
million lower for the full-year and $0.2 million lower for the fourth quarter).
The full-year and fourth quarter decreases were offset by:
•
•
•
Increases in bad debt expense ($0.6 million higher for the full-year and $0.3 million higher for the fourth quarter);
Increases in stock compensation expense ($0.4 million higher in the fourth quarter), related to the retirement of the former President and CEO; and
Increases in taxes and licenses fees ($0.1 million higher in the fourth quarter).
Consolidated operating loss for the full-year 2020 totaled $31.1 million compared to an operating loss of $1.7 million for the full-year 2019. For the fourth
quarter of 2020, operating loss was $6.9 million compared to an operating loss of $1.8 million
22
in the fourth quarter of 2019. Operating losses for the full-year 2020 were primarily attributable to our Metals Segment as discussed in the Metals Segment
Comparison of 2020 to 2019 below.
Metals Segment
The following table summarizes operating results for the two years indicated. Reference should be made to Note 14 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
Asset impairments
Goodwill impairment
Operating (loss) income
Comparison of 2020 to 2019 - Metals Segment
2020
Amount
$
$
204,459
189,103
15,356
17,538
6,214
16,203
(24,599)
%
100.0 % $
92.5 %
7.5 %
8.6 %
3.0 %
7.9 %
(12.0)% $
2019
Amount
251,078
226,852
24,226
20,534
—
—
3,692
%
100.0 %
90.4 %
9.6 %
8.2 %
— %
— %
1.5 %
Net sales for the Metals Segment totaled $204.5 million for the full year of 2020, a decrease of 19 percent compared to the same period of 2019. Net sales
for the fourth quarter of 2020 totaled $44.7 million, a decrease of 19 percent compared to the fourth quarter of 2019 net sales of $55.4 million. During the
second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19 pandemic on the oil and gas industry
and the Permian Basin. Excluding Palmer, net sales for the full-year and fourth quarter of 2020 decreased 11 percent and 15 percent, respectively.
Welded Pipe & Tube Operations net sales decreased nine percent and 13 percent for the full-year and fourth quarter of 2020, respectively, when compared
to the same periods of the prior year. The total sales decrease for the year resulted from a five percent decrease in unit volumes combined with a three
percent decrease in average selling price. For the fourth quarter of 2020, unit volumes decreased nine percent while the average selling price decreased four
percent compared to 2019. The lower average selling price for the full-year was significantly impacted by the pass through of input and cost changes
related to 304 alloy surcharges and a slightly less favorable product mix for stainless steel pipe and tube and the decline in indexed pricing for galvanized
pipe and tube.
Seamless heavy-wall carbon steel pipe and tube sales decreased 23 percent and 29 percent for the full-year and fourth quarter, respectively, of 2020
compared to the same periods of 2019. The full-year sales decrease was comprised of a 15 percent decrease in unit volumes combined with a nine percent
decrease in average selling price. For the fourth quarter, unit volumes decreased 20 percent while average selling prices decreased 11 percent. Lower
pricing was primarily due to a lower mix of energy based sales throughout the year and lower mill pricing while volume was impacted by the on-going
impacts of COVID-19 in the oil and gas industry.
As mentioned above, during the second quarter of 2020, the Company curtailed operations at its Palmer facility due to the impact of the COVID-19
pandemic on the oil and gas industry and the Permian Basin. As a result, storage tank sales decreased 81 percent and 84 percent for the full-year and fourth
quarter, respectively, of 2020 when compared to the same periods for the prior year. The full-year decrease was comprised of a 50 percent decrease in the
average selling price and a 61 percent decline in the number of tanks sold. For the fourth quarter, the storage tank sales decrease resulted from a 90 percent
decrease in average selling price offset by a 74 percent increase in unit volumes.
The Metals Segment's operating loss totaled $24.6 million for the full-year 2020 compared to operating income of $3.7 million for 2019. For the fourth
quarter 2020, operating loss was $4.8 million compared to operating income of $0.6 million for the fourth quarter of 2019. Current year operating results
were affected by the following factors:
• Non-cash goodwill impairment related to the Welded Pipe and Tube reporting unit totaling $16.2 million. See Note 5- Goodwill for further
discussion on the Company's goodwill;
• Operating losses at Palmer totaling $4.0 million and $6.2 million in non-cash, pre-tax asset impairment charges related to this business;
23
• Nickel prices and resulting surcharges for 304 and 316 alloys experienced significant increases and decreases during 2020, 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 2020 generated a net unfavorable operating impact of $5.3 million related to metal pricing, compared to a net unfavorable
operating impact of $6.4 million in 2019;
• Operating income from seamless carbon pipe and tube showed a decline of $2.4 million related to lower volume and pricing noted above; and
• Year over year changes in volume, pricing and product mix in welded pipe and tube, as noted above, combined for a $0.5 million decline in
operating profit margins in 2020 compared to 2019.
Selling, general and administrative expense decreased $3.0 million, or 15 percent, for the full-year 2020 when compared to 2019. This expense category
was nine percent of sales for 2020 and eight percent of sales for 2019. For the fourth quarter of 2020, selling, general and administrative expense was $3.9
million (nine percent of sales), a decrease of $1.2 million from $5.1 million (nine percent of sales) for the same period of 2019. The changes in selling,
general and administrative expense resulted from:
•
•
Salaries, commissions and employee benefit costs (lower by $1.8 million and $0.5 million for the full-year and fourth quarter, respectively);
Incentive bonus and stock compensation expense (lower by $1.2 million and $0.9 million for the full-year and fourth quarter, respectively);
• Amortization expense (lower by $0.5 million and $0.2 million for the full-year and fourth quarter, respectively); and
•
Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic (lower by $0.5 million and
$0.1 million for the full-year and fourth quarter, respectively).
The full-year and fourth quarter decreases were offset by:
•
Bad debt expense ($0.7 million and $0.3 million higher for the full-year and fourth quarter, respectively);
• Higher professional fees ($0.2 million higher for the full-year 2020); and
•
Taxes and Licenses fees ($0.1 million higher for the full-year 2020 and the fourth quarter, respectively).
Specialty Chemicals Segment
The following tables summarize operating results for the two years indicated. Reference should be made to Note 14 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
Operating income
2020
Amount
$
$
51,541
43,736
7,805
3,772
4,033
%
100.0 % $
84.9 %
15.1 %
7.3 %
7.8 % $
2019
Amount
54,090
46,983
7,107
4,296
2,811
%
100.0 %
86.9 %
13.1 %
7.9 %
5.2 %
24
Comparison of 2020 to 2019 – Specialty Chemicals Segment
Net sales for the Specialty Chemicals Segment decreased five percent, or $2.5 million, to $51.5 million for 2020 compared to $54.1 million in 2019. For
the fourth quarter of 2020, sales were $11.2 million, representing an 11 percent decrease from $12.6 million for the same quarter of 2019. For the full-year,
overall shipped pounds were up flat to prior year on a decrease in volume of four percent for contract manufactured products and a seven percent increase
in tolled products. For the fourth quarter of 2020, pounds shipped increased two percent. Overall selling prices decreased five percent and 13 percent for
the full-year and fourth quarter of 2020, respectively, compared to the same periods of 2019. Net sales were unfavorably impacted during the full-year of
2020 from downturns in demand due to weak industrial and manufacturing activities related to the COVID-19 pandemic. The Specialty Chemicals
Segment was able to increase production of hand sanitizer and cleaning aids to help offset the reduced production into the oil and gas industry while also
implementing cost cutting measures allowing the Segment to generate increased profits on lower sales volume.
The Specialty Chemicals Segment's operating income for the full-year of 2020 totaled $4.0 million compared to operating income of $2.8 million for the
full-year 2019. The fourth quarter of 2020 increased 24 percent from the prior year quarter to $0.5 million. During 2020, gross profit margin increased as a
percentage of net sales over 2019 levels, at 15 percent versus 13 percent, respectively, primarily driven by favorable reductions in shipping costs
($0.1 million), inventory shrinkage ($0.1 million) and favorable manufacturing variance adjustments ($0.7 million) over 2019.
Selling, general and administrative expense decreased $0.5 million or 12 percent, to $3.8 million in 2020 when compared to 2019 expense of $4.3 million,
which represented seven percent of sales and eight percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was
$1.1 million (10 percent of sales) in 2020, an increase of $0.1 million when compared to $1.0 million (eight percent of sales) for the same period of 2019.
The full-year decreases in selling, general and administrative expenses resulted from:
•
•
•
Salaries, commissions and employee benefits ($0.5 million and $0.1 million lower for the full-year and fourth quarter, respectively);
Travel expense related to the Company reducing all non-essential travel in response to the COVID-19 pandemic ($0.1 million lower for the
full-year 2020); and
Bad debt expense ($0.1 million lower for the full-year 2020).
The full-year and fourth quarter decreases were offset by:
•
Incentive bonus expense ($0.1 million and $0.2 million higher for the full-year and fourth quarter, respectively); and
• Higher professional fees ($0.1 million higher for the full-year 2020).
25
Comparison of 2020 to 2019 - Corporate
Corporate expenses decreased $0.5 million to $7.9 million, or three percent of sales, in 2020 down from $8.4 million, or three percent of sales, in 2019. The
full-year decrease resulted primarily from:
•
•
•
Travel expense decreased $0.3 million as a result of COVID-19 and the Company's decision to eliminate all non-essential travel;
Professional fees decreased by $0.2 million from the prior year resulting from lower banking fees in the current year;
Performance based bonuses decreased $0.2 million due to lower attainment of pre-defined Adjusted EBITDA targets in the year; and
• Other corporate overhead expenses decreased $0.6 million driven by lower repair and maintenance expense and lower directors' fees for the
year.
The full-year decreases were partially offset by:
•
Employee benefit costs increased $0.9 million driven by severance costs of $1.1 million related to the retirement of the former President and
CEO.
Interest expense was $2.1 million and $3.8 million for the full-years of 2020 and 2019, respectively. The decrease was primarily related to lower average
debt outstanding in the full year of 2020 driven by $10.7 million of working capital reductions in the year.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the
United States ("GAAP"), we use the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), and Adjusted
Diluted Earnings (Loss) Per Share. Management believes that these non-GAAP measures provide additional useful information to allow readers to compare
the financial results between periods. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition
as promulgated under GAAP, and investors should consider the Company's performance and financial condition as reported under GAAP and all other
relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, and
investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.
EBITDA and Adjusted EBITDA
We define "EBITDA" as earnings before interest (including change in fair value of interest rate swap), income taxes, depreciation and amortization. We
define "Adjusted EBITDA" as EBITDA further adjusted for the impact of non-cash and other items we do not consider in our evaluation of ongoing
performance. These items include: goodwill impairment, asset impairment, gain on lease modification, interest expense (including change in fair value of
interest rate swap), income taxes, depreciation, amortization, stock-based compensation, non-cash lease cost, acquisition costs and other fees, proxy contest
costs, shelf registration costs, earn-out adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs,
restructuring and severance costs and other adjustments from net income. We caution investors amounts presented in accordance with our definitions of
EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA
and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures
of our performance and investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for
comparing our ongoing results of operations.
26
Consolidated EBITDA and Adjusted EBITDA are as follows:
($ in thousands)
Consolidated
Net loss
Adjustments:
Interest expense
Change in fair value of interest rate swap
Income taxes
Depreciation
Amortization
EBITDA
Acquisition costs and other
Proxy contest costs
Shelf registration costs
Earn-out adjustments
Gain on investments in equity securities
Asset impairments
Goodwill impairment
Gain on lease modification
Stock-based compensation
Non-cash lease expense
Retention expense
Restructuring and severance costs
Adjusted EBITDA
% sales
Year Ended December 31,
2019
2020
$
(27,267)
$
(3,036)
2,110
51
(4,706)
7,572
3,028
(19,212)
861
3,105
—
(1,195)
(170)
6,214
16,203
(171)
1,791
510
235
1,076
9,247
$
3,818
141
(727)
7,578
3,486
11,260
1,936
—
10
(747)
(1,873)
—
—
—
2,091
560
223
—
13,460
3.6 %
4.4 %
$
27
Metals Segment EBITDA and Adjusted EBITDA are as follows:
($ in thousands)
Metals Segment
Net (loss) income
Adjustments:
Interest expense
Depreciation
Amortization
EBITDA
Acquisition costs and other
Earn-out adjustments
Asset impairments
Goodwill impairment
Stock-based compensation
Retention expense
Metals Segment Adjusted EBITDA
% of segment sales
Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:
($ in thousands)
Specialty Chemicals Segment
Net income
Adjustments:
Interest expense
Depreciation
EBITDA
Stock-based compensation
Specialty Chemicals Segment Adjusted EBITDA
% of segment sales
Year Ended December 31,
2019
2020
$
(22,388)
$
4,356
11
5,855
3,028
(13,494)
16
(1,195)
6,214
16,203
303
—
8,047
$
83
5,954
3,486
13,879
1,381
(747)
—
—
663
123
15,299
3.9 %
6.1 %
Year Ended December 31,
2019
2020
4,046
$
2,811
9
1,552
5,607
207
5,814
$
—
1,461
4,272
226
4,498
11.3 %
8.3 %
$
$
$
28
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share are non-GAAP measures and exclude goodwill impairment, asset impairment,
gain on lease modification, stock-based compensation, non-cash lease costs, acquisition costs, proxy contest costs, shelf registration costs, earn-out
adjustments, realized and unrealized (gains) and losses on investments in equity securities, retention costs and restructuring and severance costs from net
income. They also utilize a constant effective tax rate to reflect tax neutral results. Adjusted net (loss) income and adjusted diluted (loss) earnings per share
should not be considered an alternative to, or a more meaningful indicator of, the Company's net (loss) income or diluted (loss) earnings per share as
prepared in accordance with GAAP. The Company's methods of determining this non-GAAP financial measure may differ from the method used by other
companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by
other companies.
The reconciliation of net income (loss) and earnings (loss) per share to adjusted net income (loss) and adjusted earnings (loss) per share is as follows:
(Amounts in thousands, except per share data)
Loss before income taxes
Adjustments:
Acquisition costs and other
Proxy contest costs
Shelf registration costs
Earn-out adjustments
Gain on investments in equity securities
Asset impairments
Goodwill impairment
Gain on lease modification
Stock-based compensation
Non-cash lease expense
Retention expense
Restructuring and severance costs
Adjusted loss before income taxes
Benefit for income taxes at 21%
Adjusted net loss
Average shares outstanding, as reported
Basic
Diluted
Adjusted net loss per common share
Basic
Diluted
29
Year Ended December 31,
2020
2019
$
(31,973) $
(3,763)
861
3,105
—
(1,195)
(170)
6,214
16,203
(171)
1,791
510
235
1,076
(3,514)
(738)
1,936
—
10
(747)
(1,873)
—
—
—
2,091
560
223
—
(1,563)
(328)
$
(2,776) $
(1,235)
9,099
9,099
$
$
(0.31) $
(0.31) $
8,983
8,983
(0.14)
(0.14)
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including level of investment required to
support our business strategies, the performance of our business, capital expenditures, credit facilities and working capital management. Capital
expenditures and share repurchases are a component of our cash flow and capital.
Cash Flows
Cash flows were as follows:
(in thousands)
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Operating Activities
Year ended December 31,
2020
2019
17,978
994
(19,362)
$
(390) $
28,640
(25,695)
(4,539)
(1,594)
The decrease in net cash provided by operating activities for the full-year 2020 compared to the full-year 2019 was primarily driven by a net loss of $27.3
million for 2020 compared to a net loss of $3.0 million for 2019, and changes in working capital, driven by accounts receivable and inventory, which
increased operating cash flow for 2020 by approximately $14.6 million, compared to an increase of approximately $29.6 million in 2019. In 2020, accounts
receivable and inventory decreased over prior year but at a slower rate. The decrease in accounts receivable was driven by lower sales and a decrease in
days sales outstanding to 45 days as of December 31, 2020 from 46 days as of December 31, 2019. The decrease in inventory was due to continued
inventory rationalization efforts throughout 2020 to enhance the Company's liquidity position during the COVID-19 pandemic and an increase in inventory
turns from 1.62 turns as of December 31, 2019 to 1.70 turns as of December 31, 2020.
Investing Activities
Net cash provided by investing activities primarily consists of transactions related to capital expenditures, equity security transactions, and acquisitions.
The increase in cash provided by investing activities for the full-year 2020 compared to cash used in investing activities for the full-year 2019 was
primarily due to a decrease in cash outflows related to the American Stainless acquisition in the prior year not in the current year ($21.9 million), an
increase in net proceeds from the sale of equity securities in the current year over the prior year ($4.4 million) and decreases in capital expenditures
($0.8 million).
Financing Activities
Net cash used in financing activities primarily consist of transactions related to our long-term debt. The increase in net cash used in financing activities for
the full-year 2020 compared to the full-year 2019 was primarily due to borrowings from the Term Loan related to the American Stainless acquisition in the
prior year not in the current year.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents and our credit facilities are our most significant sources of liquidity. We
believe our sources of liquidity will be sufficient to fund operations, debt obligations and anticipated capital expenditures over the next 12 months.
The Company has a $100 million asset-backed revolving Line with a maturity date of December 20, 2021 and a $20 million Term Loan with a maturity
date of February 1, 2024. As of December 31, 2020, the Company had $61.4 million of total borrowings outstanding with its lender, down $14.2 million
from the balance as of December 31, 2019. As of December 31, 2020, the Company had $11.0 million of remaining available capacity under the Line. See
Note 6 - Long-term Debt, in the notes to the consolidated financial statements for additional information.
30
The Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio of not less than 1.25, maintaining a minimum
tangible net worth of not less than $60.0 million, and a limitation on the Company's maximum amount of capital expenditures per year, which is in line
with current projected needs.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarters ended June 30, 2020 and
September 30, 2020. To address the technical defaults, the Company entered into two amendments to its Credit Agreement with its bank subsequent to the
end of the each quarter. See Note 6 - Long-term Debt, in the notes to the consolidated financial statements for additional information.
As of December 31, 2020, the Company had a minimum fixed charge coverage ratio of 1.43, a minimum tangible net worth of $67.1 million and was in
compliance with all debt covenants.
On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. providing the Company with a
new four-year revolving credit facility (the "Facility"). The new Credit Agreement provides the Company with up to $150.0 million of borrowing capacity.
The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank ("Truist"), which was
scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled
to mature on February 1, 2024. The initial borrowing capacity under the Facility totals $110.0 million. See Note 6 and Note 18 for additional details on this
new agreement.
Stock Repurchases and Dividends
We repurchase common stock and pay dividends pursuant to programs approved by our Board of Directors. The payment of cash dividends is also subject
to customary legal and contractual restrictions. Our capital allocation strategy is to first fund operations and investments in growth and then return excess
cash over time to shareholders through share repurchases and dividends.
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 24
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. As of December 31, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.
Stock repurchase activity was as follows:
Number of shares repurchased
Average price per share
Total cost of shares repurchased
Year ended December 31,
2020
2019
59,617
10.65
636,940 $
$
$
—
—
—
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 2020 and 2019, no dividends were declared or paid by the Company.
Other Financial Measures
Below are additional financial measures that we believe are important in understanding the Company's liquidity position from year to year. The metrics are
defined as:
Current ratio = current asset divided by current liabilities
Debt to capital = Total debt divided by total capital
Return on average equity = net income divided by the trailing 12-month average of equity
Results of these additional financial measures are as follows:
31
Current ratio
Debt to capital
Return on average equity
Year ended December 31,
2020
4.1
43%
(29.2)%
2019
3.6
41%
(2.9)%
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial
position, revenues, results of operations, liquidity, or capital expenditures.
As of December 31, 2020, the Company's contractual obligations and other commitments were as follows:
(in thousands)
Obligations:
(1)
Revolving credit facility
(1)
Term loans
Interest on bank debt
Finance lease
Operating leases
Total
Total
2021
2022
2023
2024
2025
Thereafter
Payment Obligations for the Year Ended
$
$
49,037 $
12,333
1,284
58
61,682
124,394 $
49,037 $
4,000
1,102
20
3,610
57,769 $
— $
4,000
131
15
3,665
7,811 $
— $
4,000
48
15
3,699
7,762 $
— $
333
3
8
3,549
3,893 $
— $
—
—
—
3,619
3,619 $
—
—
—
—
43,540
43,540
(1) On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A .providing the Company with a new four-year revolving credit facility. The amounts in the table above do not
include the effects of the debt refinance. See Note 6 and Note 18 for additional details on this new agreement
Critical Accounting Policies and Estimates
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 affect its more significant judgments and estimates used in the preparation of
the Company's consolidated financial statements.
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. 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.
Earn-Out Liabilities
In connection with the American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period
of three years following closing equal to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period.
In connection with the MUSA-Galvanized acquisition, 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.
In connection with the MUSA-Stainless acquisition, 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).
32
The fair value of the contingent consideration earn-out liabilities are 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 liabilities 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 loss.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is tested for impairment at least on an annual basis. Goodwill
was $1.4 million and $17.6 million as of December 31, 2020 and 2019, respectively.
Impairment of Goodwill
We evaluate the carrying value of goodwill annually as of October 1 and between annual evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its carrying amount.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that
the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's
carrying value is compared to its fair value. The fair value of the reporting units are estimated using a combination of the discounted cash flow method and
the market based approach. This method uses projections of cash flows from the reporting unit as well as available comparable company information. 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.
Goodwill is considered impaired if the carrying value of the reporting unit exceeds it fair value.
During 2020, goodwill was allocated to the Welded Pipe & Tube reporting unit found within the Metals Segment and the Specialty Chemicals Segment.
During the second quarter, third quarter, and fourth quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe &
Tube reporting unit existed and interim goodwill impairment tests were performed. As a result of these interim impairment tests, the Company recorded
goodwill impairment of $16.2 million related to the Welded Pipe and Tube reporting unit.
We conducted our annual impairment test of the Specialty Chemicals Segment as of October 1, 2020 and 2019. As of December 31, 2020 and 2019, we
determined that no impairment of the carrying value of goodwill for this reporting unit was required. See Note 5 - Goodwill in the notes to the consolidated
financial statements included in this report for additional information.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. 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. Factors influencing these adjustments include changes in demand, product life cycle,
cost trends and product pricing.
33
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 as of December 31, 2020, which approximated the recorded value, consisted of:
• $49.0 million under a revolving line of credit with an availability of $11.0 million, maturing December 20, 2021 with a variable interest rate of
1.81 percent;
• $12.3 million under a term loan, maturing February 1, 2024 with a variable interest rate of 2.06 percent; and
• An interest rate swap contract with a notional amount of $3.8 million which fixes the term loan interest rate at 3.74 percent. The fair value of
the interest rate swap contract was a liability to the Company of $45,041.
On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. providing the Company with a
new four-year revolving credit facility. See Note 18 for additional details on this new agreement.
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 (containing nickel alloy) is subject to a variable
pricing component for alloys (nickel, chrome, molybdenum and iron) contained in the product. As of December 31, 2020, the Company had no such hedge
contracts in place.
34
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 for the Company, as such
term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that
receipts and expenditures of Company assets are made in accordance with management authorization and providing reasonable assurance that unauthorized
acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be detected or prevented on a timely
basis.
Because of innate limitations, internal control over our financial statements is not intended to provide absolute guarantee that a misstatement can be
detected or prevented in the statements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to 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 our internal control over financial reporting based on the framework in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO framework). A material weakness
is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on this evaluation, and those criteria, the Company's CEO and CFO concluded that the Company's internal control over financial reporting was
effective as of December 31, 2020.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange
Commission that permit us to provide only management's report in this Annual Report as a non-accelerated filer.
Changes in Internal Control Over Financial Reporting
Other than the actions taken as described below under "Remediation Efforts to Address Material Weakness," there were no changes in the Company's
internal control over financial reporting during the fourth quarter of 2020, which were identified in connection with management's evaluation required by
paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Remediation Efforts to Address Material Weakness
In response to the material weakness identified in Management’s Report on Internal Control Over Financial Reporting as set forth in item 4 “Controls and
Procedures” in the second quarter 2020 Form 10-Q filing, management, with oversight from the Audit Committee of the Board of Directors, developed and
fully executed a plan to remediate the material weakness at Synalloy. The remediation actions included the following:
•
•
•
•
Conducted executive coaching and mentoring sessions with select executives to reinforce their responsibility in maintaining effective internal
control over financial reporting;
Performed activities to identify, evaluate, and align job descriptions with job responsibilities;
Reaffirmed communication protocols and refreshed policies related to the transition process for new finance executives and Audit Committee
members; and
Implemented an independent third-party Ethics and Compliance Hotline service for the receipt and timely reporting to the Audit Committee.
During our fourth fiscal quarter of 2020, we completed our testing of the operating effectiveness of the controls and found them to be effective. As a result,
we have concluded the material weakness has been remediated as of December 31, 2020.
35
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, 2020 and
2019, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the years then ended, 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, 2020 and 2019, and the results of its operations and its
cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
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 Public Company Accounting Oversight Board
(United States) (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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Earn-out liabilities
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has recorded a liability for the quarterly earn-out payments to
be made to the previous owners of acquired businesses, which included MUSA-Galvanized and ASTI. The earn-out payments are based on actual
revenues earned over the respective earn-out periods pursuant to the asset purchase agreements. The fair value of the earn-out liabilities was
estimated by applying the probability-weighted expected return method using management’s revenue projections, which required an estimation of
pounds to be shipped and future price per unit. The fair value of the earn-out liabilities as of December 31, 2020 was $3.7 million, of which $3.3
million related to the MUSA-Galvanized and ASTI acquisitions. The liabilities are classified as Level 3 in the fair value hierarchy.
We identified the earn-out liabilities for the MUSA-Galvanized and ASTI acquisitions as a critical audit matter. Significant auditor judgment was
required in evaluating management’s revenue projections used in the fair value estimation of the related earn-out liabilities due to the unobservable
nature of management’s projections of pounds to be shipped and the future price per unit.
36
The following are the primary procedures we performed to address this critical audit matter. We compared the Company’s historical revenue
forecasts to actual results to assess the Company’s ability to accurately forecast and we performed sensitivity analyses over the Company’s
revenue projections (pounds and price) to assess the impact on the Company’s determination of the fair value of the earn-out liabilities. We
involved valuation professionals with specialized skills and knowledge, who utilized third-party market research tools to assist in the evaluation of
the revenue projections by comparing third-party market data to the Company’s revenue projections.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond, Virginia
March 9, 2021
37
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
Page
39
40
41
42
43
38
SYNALLOY CORPORATION
Consolidated Balance Sheets
As of December 31, 2020 and 2019
(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
Total assets
Liabilities and Shareholders' equity
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term debt
Current portion of earn-out liability
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
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
Less cost of common stock in treasury - 1,123,319 and 1,257,784 shares, respectively
Total shareholders' equity
Commitments and contingencies – see Note 12
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
39
$
$
$
2020
2019
236 $
28,183
35,997
20,304
28,779
85,080
13,384
126,883
35,096
31,769
1,355
11,426
455
206,984 $
19,732 $
6,123
875
3,434
867
19
31,050
60,495
287
32,771
37
1,957
92
10,300
37,719
42,835
90,854
10,559
80,295
626
35,074
42,643
17,354
38,189
98,186
13,229
147,115
40,690
35,772
17,558
15,714
348
257,197
21,150
6,037
4,000
5,576
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
$
206,984 $
257,197
SYNALLOY CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31, 2020 and 2019
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Acquisition related costs
Proxy contest costs
Earn-out adjustments
Asset impairments
Goodwill impairment
Gain on lease modification
Operating loss
Other (income) and expense
Interest expense
Change in fair value of interest rate swap
Other, net
Loss before income taxes
Benefit from income taxes
Net loss and comprehensive loss
Net loss per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
40
$
$
$
2020
2019
256,000 $
233,348
22,652
305,168
274,395
30,773
28,718
845
3,105
(1,195)
6,214
16,203
(171)
(31,067)
2,110
51
(1,255)
(31,973)
(4,706)
(27,267)
(3.00) $
(3.00) $
9,099
9,099
32,627
601
—
(747)
—
—
—
(1,708)
3,818
141
(1,904)
(3,763)
(727)
(3,036)
(0.34)
(0.34)
8,983
8,983
SYNALLOY CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2020 and 2019
(in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense
Amortization expense
Amortization of debt issuance costs
Asset impairments
Goodwill impairment
Unrealized gain on equity securities
Deferred income taxes
Proceeds from business interruption insurance
Loss (gain) on sale of equity securities
Earn-out adjustments
Payments of earn-out liabilities in excess of acquisition date fair value
Provision for (reduction of) losses on accounts receivable
Provision for losses on inventories
Loss (gain) on sale of property, plant and equipment
Non-cash lease expense
Non-cash lease termination loss
Gain on lease modification
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 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 equity securities
Acquisitions
Net cash provided by (used in) investing activities
Financing activities
Repayments on line of credit
Borrowings from term loan
Payments on long-term debt
Principal payments on finance lease obligations
Payments for finance lease terminations
Payments on earn-out liabilities
Payments of deferred financing costs
Proceeds from exercised stock options
Repurchase of common stock
Net cash used in financing activities
Decrease 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.
2020
2019
$
(27,267)
$
7,572
3,028
177
6,214
16,203
(208)
1,167
1,040
38
(1,195)
(292)
890
271
237
510
24
(171)
51
345
1,791
5,552
9,122
(912)
(1,418)
86
(4,877)
17,978
(3,748)
312
—
4,430
—
994
(10,184)
—
(4,000)
(109)
(204)
(3,946)
(284)
—
(635)
(19,362)
(390)
626
236
$
$
41
(3,036)
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
SYNALLOY CORPORATION
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2020 and 2019
(in thousands, except share and per share data)
Balance December 31, 2018
$
10,300 $
36,521 $
68,965 $
— $
(13,302) $
102,484
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Cost of
Common
Stock in
Treasury
Total
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
Balance December 31, 2019
Net loss
Cumulative adjustment due to adoption of ASU 2016-13
Issuance of 194,082 shares of common stock from treasury
Stock-based compensation
Purchase of common stock
Balance December 31, 2020
See accompanying notes to consolidated financial statements.
$
$
—
—
—
—
—
10,300 $
—
—
—
—
—
10,300 $
42
—
—
(1,217)
12
2,091
37,407 $
—
—
(1,479)
1,791
—
37,719 $
(3,036)
4,623
—
—
—
70,552 $
(27,267)
(450)
—
—
—
42,835 $
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
1,521
33
—
(11,748) $
—
—
1,824
—
(635)
(10,559) $
(3,036)
4,623
304
45
2,091
106,511
(27,267)
(450)
345
1,791
(635)
80,295
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,
2020, 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 pipe and tube, 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 Specialty Chemicals Segment operates as one reportable unit and is comprised of Manufacturers
Chemicals, LLC ("MC"), a wholly-owned subsidiary of Manufacturers Soap and Chemical Company ("MS&C"), and CRI Tolling, LLC ("CRI Tolling")
and produces specialty chemicals.
Principles of Consolidation and Presentation
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. Certain prior year amounts have been
reclassified to conform with current year presentation.
Use of Estimates
The preparation of the Company's financial statements in accordance with accounting principles generally accepted in the United States of America
requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent
assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form
the basis for making estimates concerning the carrying value of assets and liabilities that are readily available from other sources. Actual results may differ
from these estimates.
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 credit losses for projected uncollectible amounts. The allowance is based upon an analysis of accounts receivable balances with similar risk
characteristics on a collective basis, considering factors such as the aging of receivables balances, historical loss experience, current information, and future
expectations. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should
instead be evaluated as part of another pool or on an individual basis. 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.
43
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Inventories
Inventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods.
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 year ended December 31, 2020, adjustments of $3.8 million to inventory cost were required by our storage tank facility due to the curtailment of
operations at our Palmer facility as a result of the COVID-19 pandemic and lower demand for oil and gas products which caused the net realizable value to
fall below inventory cost for certain tanks.
During the year ended December 31, 2019, adjustments of $0.2 million 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 and tube) 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, 2020 and 2019, respectively, no material LCNRV adjustments were required by our Metals Segment other than those at our storage tank
facility.
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 $0.2 million and $0.3 million as of December 31,
2020 and 2019, 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 most recent physical inventory results. The Company had $0.5 million and
$0.4 million reserved for physical inventory quantity losses as of December 31, 2020 and 2019, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is determined based 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.
44
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Goodwill and Intangible Assets
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.
During the second quarter, third quarter, and fourth quarter of 2020, the Company identified potential indicators of impairment within the Welded Pipe &
Tube reporting unit included in the Metals Segment existed and performed interim goodwill impairment testing analyses. As a result of these analyses, the
Company recorded a full goodwill impairment charge of $10.7 million in the third quarter of 2020 and $5.5 million in the fourth quarter of 2020. No
goodwill impairment was identified as a result of the annual testing procedures performed for the Specialty Chemicals Segment for the year ended
December 31, 2020.
No goodwill impairment was identified as a result of the testing procedures performed for the year ended December 31, 2019.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions and are amortized over their estimated
useful lives using either an accelerated or straight-line method over a period ranging from eight to 15 years. The weighted average amortization period for
the customer relationships is approximately 11 years.
During the second quarter of 2020, due to the continued curtailment of operations related to the COVID-19 pandemic and management's decision to pursue
a sale and exit of the Palmer business, the intangible customer list related to Palmer was written down to its estimated fair market value of zero, resulting in
an impairment charge of $1.3 million, which is included in "Asset impairments" on the consolidated statement of operations and comprehensive loss.
Intangible assets totaled $31.7 million and $32.6 million as of December 31, 2020 and 2019, respectively. Accumulated amortization of intangible assets as
of December 31, 2020 and 2019 totaled $19.8 million and $16.6 million, respectively.
Estimated amortization expense for the next five fiscal years based on existing intangible assets is as follows:
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total
2,721
2,501
1,050
952
855
3,347
11,426
The Company recorded amortization expense of $3.0 million and $3.5 million for 2020 and 2019, respectively, which excludes amortization expense of
debt issuance costs, which is reflected in the consolidated financial statements as interest expense.
Long-Lived Asset Impairment
The carrying amounts of long-lived assets are reviewed whenever certain events or changes in circumstances indicate that the carrying amounts may not be
recoverable. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the
use and eventual disposition of the assets are less than the carrying amounts of the assets. An impairment loss is recorded for long-lived assets held-for-use
when the carrying amount of the asset is not recoverable and exceeds its fair value.
For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used. Until it ceases to be used, the Company
continues to classify the asset as held-for-use and test for potential impairment accordingly. If the Company commits to a plan to abandon a long-lived asset
before the end of its previously estimated useful life, its depreciable life is re-evaluated.
Fair value measurements associated with long-lived asset impairments are included in Note 3 to the consolidated financial statements.
45
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Earn-Out Liabilities
In connection with the American Stainless acquisition, the Company is required to make quarterly earn-out payments to American Stainless for a period
of three years following closing equal to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period.
In connection with the MUSA-Galvanized acquisition, 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.
In connection with the MUSA-Stainless acquisition, 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 earn-out liabilities are 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 liabilities 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 loss. See Note 3 for additional
information on the Company's earn-out liabilities.
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. See Note 2 - Revenue Recognition for additional information on the Company's revenue.
Shipping Costs
Shipping costs of approximately $8.0 million and $10.9 million in 2020 and 2019, respectively, are recorded in cost of goods sold on the consolidated
statement of operations and comprehensive loss.
Research and Development Expenses
The Company incurred research and development expense of approximately $0.5 million and $0.6 million in 2020 and 2019, respectively.
Stock-Based Compensation
Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated statements of operations and
comprehensive loss 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 8 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.
Additionally, the Company maintains reserves for uncertain tax provisions, if necessary. See Note 9 for additional information on the Company's income
taxes.
46
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
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.
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 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. The Company's leases
generally do not have an 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. Lease costs are recognized on a straight-line basis over the lease term.
Right-of-use assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of the remaining lease
payments and estimated incremental borrowing rate upon lease modification. The difference between the remeasured right-of-use asset and the operating
lease liabilities are recognized as a gain or loss within operating expenses. The Company reviews any changes to its lease agreements for potential
modifications and/or indicators of impairment of the respective right-of-use asset. See Note 11 for additional information on the Company's leases.
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
On January 1, 2020, the Company adopted ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. The updated guidance removes disclosure requirements pertaining to the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value
measurements. In addition, the amendment clarifies that the measurement uncertainty disclosure is to communicate information about uncertainty in
measurement as of the reporting date. The guidance also adds disclosure requirements for changes in unrealized gains and losses for the period included in
other comprehensive income for recurring Level 3 measurements held at the end of the reporting period as well as the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of this standard by the Company did not have a material
impact on the consolidated financial statements or footnote disclosures. See Note 3 for further discussion on the Company's fair value measurements.
On January 1, 2020, the Company adopted 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 adoption of this standard by the Company did not have a material impact on the consolidated financial
statements.
On January 1, 2020, the Company adopted 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. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective. The Company evaluated its financial instruments and determined that its trade accounts receivable are subject to
the new current expected credit loss model. Based upon the application of the new current expected credit loss model, on January 1, 2020, we recorded a
cumulative effect adjustment of $0.4 million to Retained Earnings. The adoption of this standard by the Company did not have a material impact on the
consolidated statement of operations and comprehensive loss or cash flows.
47
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On September 30, 2020, the Company early adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This
ASU removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period,
and the recognition of deferred tax liabilities for outside basis differences as well as adds guidance to reduce complexity in certain areas, including
recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The most significant impact to the Company is the
removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. The adoption of this standard by the Company did not have a material
effect on the consolidated financial statements or footnote disclosures.
Recently Issued Accounting Standards - Not Yet Adopted
The Company considers the applicability and impact of all ASU's. Recently issued ASU's not listed were assessed and determined to be either not
applicable or are expected to have no material impact on our consolidated financial statements.
Note 2: 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)
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
Net sales
Arrangements with Multiple Performance Obligations
December 31,
2020
2019
$
$
51,541 $
154,974
23,670
5,503
20,312
256,000 $
54,090
167,907
30,607
28,722
23,842
305,168
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.
48
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 3: Fair Value of Financial Instruments
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
During 2020, the Company sold 1.2 million shares of equity securities for a realized loss of $37,954. During 2019, the Company sold 0.5 million shares of
equity securities for a realized gain of $0.3 million.
The Company held no equity securities as of December 31, 2020. The fair value of equity securities held by the Company as of December 31, 2019 was
$4.3 million 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 a liability of $45,041 and an
asset of $6,088 as of December 31, 2020 and 2019, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in its
fair value are 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.
Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration liabilities ("earn-out") resulting from the 2019 American Stainless acquisition, 2018 MUSA-Galvanized
acquisition and 2017 MUSA-Stainless acquisition are classified as Level 3. The fair value as of December 31, 2020 of the MUSA-Stainless earn-out, the
MUSA-Galvanized earn-out and 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
49
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
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.
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 2020 and
2019:
(in thousands)
Balance 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 December 31, 2019
Earn-out payments during period
Changes in fair value during the period
Balance December 31, 2020
$
$
$
MUSA-
Stainless
MUSA-
Galvanized
American
Stainless
Total
4,252 $
3,358 $
— $
7,610
—
(1,634)
(215)
2,403 $
(1,625)
(403)
375 $
—
(712)
(864)
1,782 $
(611)
(230)
941 $
6,366 $
(1,729) $
332 $
4,969 $
(2,002) $
(562) $
2,405 $
6,366
(4,075)
(747)
9,154
(4,238)
(1,195)
3,721
For the year ended December 31, 2020, the Company had no unrealized gains or losses included in other comprehensive income for recurring Level 3 fair
value instruments.
Quantitative Information about Significant Unobservable Inputs Used in Level 3 Fair Value Measurements
The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration (earn-out) liabilities as of
December 31, 2020:
Instrument
Fair Value
December 31,
2020
Principal Valuation
Technique
Contingent consideration
(earn-out) liabilities
$3,721
Probability Weighted
Expected Return
Significant Unobservable
Inputs
Discount rate
Range
-
Weighted
Average
5%
Timing of estimated payouts
2021 - 2022
-
Future revenue projections
$4.7M - 12.7M
$9.7M
The weighted average discount rate was calculated by applying an equal weighting to each contingent consideration's (earn-out liabilities) discount rate.
The weighted average future revenue projection was calculated by applying an equal weighting of probabilities to each forecasted scenario within the
valuation models to determine the probability weighted sales applicable to the contingent consideration (earn-out liabilities).
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company's significant assets or liabilities measured at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived
assets and goodwill for the year ended December 31, 2020.
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts
may not be recoverable. With input from executive management, the Company's accounting and finance personnel that organizationally report to the chief
financial officer, assess performance quarterly against historical patterns, projections of future profitability, and whether it is more likely than not that the
assets will be disposed of significantly prior to the end of their estimated useful life for evidence of possible impairment. An impairment loss is recognized
when the carrying amount of the asset (disposal) group is not recoverable and exceeds fair value. The Company estimates the fair values of assets subject to
long-lived asset impairment based on the Company's own judgments about the assumptions market participants would use in pricing the assets and
observable market data, when available. The Company classifies these fair value measurements as Level 3.
50
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
During 2020, due to the continued curtailment of operations related to the COVID-19 pandemic, inventory of Palmer was written down to its net realizable
value of $2.1 million and certain long-lived assets of Palmer, including tangible and intangible assets, were written down to their estimated fair value of
$1.4 million, resulting in asset impairment charges of $6.2 million.
The Company evaluates goodwill for impairment annually and earlier if an event or other circumstances indicates that we may not recover the carrying
value of the asset. During 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the
Metals Segment existed and, as a result of the Company's goodwill impairment evaluations, it was concluded that the estimated fair value of the Welded
Pipe and Tube reporting unit was below its carrying value resulting in a full impairment charge of $16.2 million. See Note 5 - Goodwill for additional
details. The Company classifies these fair value measurements as Level 3.
The Company's 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 for the year ended December 31, 2019.
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).
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, 2020 and 2019, 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, 2020 or 2019, respectively.
Note 4: 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
The Company recorded depreciation expense of $7.6 million for 2020 and 2019.
51
2020
2019
$
$
3 $
2,939
84
100,352
2,772
106,150
71,054
35,096 $
63
1,921
214
100,300
2,999
105,497
64,807
40,690
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 5: Goodwill
During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in
the Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued deterioration in macroeconomic conditions, continued risks
within the stainless steel industrial business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively,
indicated that the reporting unit had experienced a triggering event. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting
unit for impairment. Fair value of the reporting unit was determined using an income approach. Determining the fair value of the reporting unit to
determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These
estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts,
including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly
different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting
unit was greater than its carrying value by 1.7% and, as such, no goodwill impairment was necessary in the quarter ended June 30, 2020.
During the third quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the
Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued declines in the Company's stock price, reporting unit operating
losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a
triggering event and the need to perform another quantitative evaluation of goodwill. As a result, the Company quantitatively evaluated the Welded Pipe &
Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based
approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by
the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the reporting unit to
determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These
estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts,
including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly
different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting
unit was below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million for the quarter ended September 30, 2020.
During the fourth quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in
the Metals Segment, with an associated goodwill balance of $5.5 million, existed. Continued risks within the stainless steel industrial business, reporting
unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had
experienced a triggering event and the need to perform another quantitative evaluation of goodwill. As a result, the Company quantitatively evaluated the
Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a
market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be
generated by the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the
reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and
assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall
operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could
produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe
and Tube reporting unit was below its carrying value by 24.1% resulting in the remainder of the goodwill attributable to the Welded Pipe and Tube
reporting unit being impaired and a goodwill impairment charge of $5.5 million for the quarter ended December 31, 2020.
52
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
During the fourth quarter of 2020, the Company completed its annual goodwill impairment evaluation for the Specialty Chemicals Segment with an
associated goodwill balance of $1.4 million. As part of the annual impairment evaluation, the Company quantitatively evaluated the reporting unit for
impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting
applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting unit's assets while
the market-based approach utilized comparable company information. Determining the fair value of the reporting unit to determine the implied fair value of
the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include
the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and
operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill
impairment evaluation, it was concluded that the estimated fair value of the Specialty Chemicals Segment was greater than its carrying value by 7.4% and,
as such, no goodwill impairment was necessary.
Changes in the carrying amount of goodwill by segment for the year ended December 31, 2020 and 2019 are as follows:
(in thousands)
Balance December 31, 2018
American Stainless Acquisition
Balance December 31, 2019
Impairment charges
Balance December 31, 2020
Note 6: Long-term Debt
Specialty Chemicals
Segment
Metals Segment
Total
$
$
$
1,355 $
—
1,355 $
—
1,355 $
8,445 $
7,758 $
16,203 $
(16,203) $
— $
9,800
7,758
17,558
(16,203)
1,355
59,221
12,333
4,000
75,554
(in thousands)
$100 million Revolving line of credit, due December 20, 2021
$20 million Term loan, due February 1, 2024
Current portion of long-term debt
Total long-term debt
2020
2019
$
$
$
$
49,037 $
11,458 $
875 $
61,370 $
Debt Refinancing: On January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. ("BMO").
The new Credit Agreement provides the Company with a new four-year revolving credit facility with up to $150.0 million of borrowing capacity (the
"Facility"). The Facility refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank ("Truist"),
which was scheduled to mature on December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was
scheduled to mature on February 1, 2024. The initial borrowing capacity under the Facility totals $110.0 million. The current portion of long-term debt as
of December 31, 2020 reflects expected payments during 2021.
In addition to refinancing the Company's previously existing bank debt, the Facility will be used for ongoing working capital needs, capital expenditures,
and general corporate purposes. Interest on the revolving line of credit portion of the Facility is calculated using the LIBOR Rate (as defined in the Credit
Agreement) plus 1.50%, subject to increase based on the calculation of Applicable Margin (as defined in the Credit Agreement). Borrowings under
revolving line of credit portion of the Facility are limited to an amount equal to the Borrowing Base calculation (as defined in the Credit Agreement) that
includes eligible accounts receivable, inventory, machinery and equipment. Interest on the term potion of the Facility is calculated using the LIBOR Rate
(as defined in the Credit Agreement) plus 1.65%, subject to increase based on the calculation of Applicable Margin (as defined in the Credit Agreement).
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. The Credit Agreement does not include any financial covenants so long as the availability under the Facility exceeds
$11.0 million. If the availability falls below the availability threshold amount, the Credit Agreement provides for a minimum fixed charge coverage ratio
equal to 1.0.
Credit Facilities Prior to Debt Refinance: On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its
Line of Credit (the "Line") from $80 million to $100 million and to create a new 5-year
53
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
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 of the Line is 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. 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
The Line interest rate was 1.81 percent and 3.50 percent as of December 31, 2020 and 2019, 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, 2020, the amount available for
borrowing under the Line was $60.0 million of which $49.0 million was borrowed, leaving $11.0 million of availability. Average Line borrowings
outstanding during fiscal 2020 and 2019 were $60.3 million and $69.1 million with weighted average interest rates of 3.50 percent and 5.52 percent,
respectively.
The term loan interest rate was 2.06 percent and 3.69 percent as of December 31, 2020 and 2019, respectively. The Company had outstanding borrowings
against the term loan of $12.3 million and 16.3 million as of December 31, 2020 and 2019, respectively.
The Company made interest payments on all credit facilities of $2.0 million and $3.5 million in 2020 and 2019, respectively.
Principal payments on long-term debt during the next five fiscal years and thereafter are as follows (in thousands):
(1)
53,037
2021
4,000
2022
4,000
2023
333
2024
—
2025
—
Thereafter
(1)The amounts in the table above do not include the effects of the Company's debt refinance. The Company's new revolving credit facility includes a $17.5 million machinery and equipment sub-limit which requires repayments of
$0.4 million quarterly starting in July 2021 with a balloon payment due upon maturity of the credit facility in 2025.
Pursuant to the Credit Agreement, the Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio of not less
than 1.25, maintaining a minimum tangible net worth of not less than $60.0 million, and a limitation on the Company’s maximum amount of capital
expenditures per year, which is in line with currently projected needs.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended June 30, 2020. To
address the technical default, the Company entered into two amendments to its Credit Agreement with its bank subsequent to the end of the second quarter.
On July 31, 2020, the Company entered into the Third Amendment to the Third Amended and Restated Loan Agreement (the "Third Amendment") with its
bank. The Third Amendment amended the definition of the fixed charge coverage ratio to include the proxy contest costs in the numerator of the ratio
calculation. Additionally, on August 13, 2020, the Company entered into the Fourth Amendment to the Third Amended and Restated Loan Agreement (the
"Fourth Amendment") with its bank. The Fourth Amendment amended the definition of the fixed charge coverage ratio to include the lesser of the actual
non-cash asset impairment charge related to Palmer, or $6.0 million in the numerator of the ratio calculation. The amendments are effective for the quarter
ended June 30, 2020 and the directly following three quarters after June 30, 2020.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended September 30, 2020.
To address the technical default, on October 23, 2020, the Company entered into the Fifth Amendment to the Third Amended and Restated Loan
Agreement (the "Fifth Amendment") with its bank. The Fifth Amendment amended the definition of the fixed charge coverage ratio to include in the
numerator (i) the calculation of losses from the suspended operations of Palmer in the amount of $1,560,000, which is effective for the quarter ended June
30, 2020 and for the directly following three quarters after June 30, 2020, (ii) the calculation of losses from the suspended operations of Palmer in the
amount of $740,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020,
and (iii) the extraordinary expenses related to the investigation of a
54
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
whistleblower complaint in the amount of $636,000, which is effective for the quarter ended September 30, 2020 and for the directly following three
quarters after September 30, 2020.
As of December 31, 2020, the Company had a minimum fixed charge coverage ratio of 1.43 and a minimum tangible net worth of $67.1 million.
Note 7: Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
Salaries, wages, and commissions
Taxes, other than income taxes
Advances from customers
Insurance
Professional fees
Warranty reserve
Benefit plans
Insurance financing liability
Current portion, capital lease obligation
Interest rate swap liability
Customer rebate liability
Other accrued items
Total accrued expenses
Note 8: Stock-Based Compensation
Overview of Stock-Based Compensation Plans
2020
2019
3,776
133
298
702
272
233
238
—
—
45
168
258
6,123 $
2,972
406
153
578
265
11
242
668
39
—
275
428
6,037
$
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, 2020, there were no 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 operations and comprehensive loss of
$1.8 million and $2.1 million in 2020 and 2019, respectively. The associated income tax benefit recognized was $0.2 million for 2020 and $0.4 million for
2019, 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.
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. 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 10 years, an
expected
55
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
volatility of 35.1 percent and a dividend yield of 1.79 percent. Compensation expense totaling $0.6 million will be recorded against earnings over the
following 36 months from the date of grant with the offset recorded in Shareholders' Equity.
On June 30, 2020 the Compensation Committee approved stock option grants under the 2011 Plan. Options for a total of 20,000 shares, with an exercise
price of $7.33 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. The per share weighted-average fair value of this stock
option grant was $2.59. The Black-Scholes model for this grant was based on a risk-free interest rate of 0.64 percent, an expected life of 10 years, an
expected volatility of 38.7 percent and a dividend yield of 1.89 percent. Compensation expense totaling $0.1 million will be recorded against earnings over
the following 36 months from the date of grant with the offset recorded in Shareholders' Equity.
A summary of activity in the Company's stock option plans is as follows:
Weighted
Average
Exercise
Price
Options
Outstanding
December 31, 2018
Exercised
December 31, 2019
Granted February 5, 2020
Granted June 30, 2020
Canceled, forfeited, or expired
December 31, 2020
Exercisable options
Options expected to vest:
December 31, 2018
Vested
December 31, 2019
Granted February 5, 2020
Granted June 30, 2020
Vested
Canceled, forfeited, or expired
December 31, 2020
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14.16
12.61
14.26
13.00
7.33
13.14
12.74
13.77
15.83
15.72
16.01
13.00
7.33
13.24
13.14
11.78
59,096
(3,628)
55,468
123,500
20,000
(19,437)
179,531
86,531
9,969
(6,246)
3,723
123,500
20,000
(34,786)
(19,437)
93,000
56
Weighted
Average
Contractual
Term
(in years)
4.8
3.8
7.2
5.1
6.0
5.1
9.2
Intrinsic
Value of
Options
Options
Available
155,845
—
155,845
(123,500)
(20,000)
19,437
31,782
$
$
$
$
$
$
$
$
$
$
$
$
143,737
18,331
9,402
—
Grant Date Fair
Value
6.44
6.46
6.11
4.53
2.59
4.68
4.62
5.53
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding as of December 31, 2020:
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
13.00
7.33
11,713 $
13,994 $
8,109 $
20,715 $
105,000 $
20,000 $
179,531
11.35
13.70
14.76
16.01
13.00
7.33
1.10
2.10
3.13
4.11
9.10
9.50
11,713 $
13,994 $
8,109 $
20,715 $
32,000 $
— $
86,531
11.35
13.70
14.76
16.01
13.00
7.33
There were no options exercised by employees and directors in 2020. In 2019, options for 3,628 shares were exercised by employees and directors for an
aggregate exercise price of $45,734.
At the 2020 and 2019 respective year ends, options to purchase 86,531 and 51,745 shares, respectively, with weighted average exercise prices of $13.77
and $14.13, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was approximately $0.4 million for 2020 and $31,186 for 2019, respectively. As of
December 31, 2020, there was $0.2 million 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 2.14 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 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 originally authorized 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. 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. Prior to May 9, 2017, 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. The fair value of the restricted stock awards are determined based on the average of the high and low common
stock price on the day prior to 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
57
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
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 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 $13.00 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.
On November 10, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan in conjunction with the
appointment of the Company's Interim President and Chief Executive Officer where 50,000 shares with a market price of $5.65 per share were granted
under the Plan. Under the terms of the associated employment agreement, two-thirds of the stock award vests over a one-year period from the effective date
of the agreement while one-third of the award vests over an 18-month period from the effective date of the agreement.
A summary of plan activity for the 2005 and 2015 Stock Awards Plans is as follows:
Outstanding December 31, 2018
Granted February 6, 2019
Vested
Forfeited
Outstanding December 31, 2019
Granted February 5, 2020
Granted November 10, 2020
Vested
Forfeited
Outstanding December 31, 2020
Shares
Weighted Average
Grant Date Fair
Value
142,174 $
44,949 $
(84,734) $
(1,614) $
100,775 $
45,418 $
50,000 $
(81,233) $
(17,535) $
97,425 $
11.45
15.72
11.76
12.44
13.28
13.00
5.65
12.87
13.11
11.97
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 $1.0 million and $1.4 million for 2020 and 2019, respectively. As of
December 31, 2020, there was $0.5 million of total unrecognized compensation cost related to unvested restricted 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 2.78 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 average of the high and low common stock price on the day
prior to 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.
58
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The weighted-average grant-date fair value per unit of performance-based restricted stock classified as equity awards granted was $13.00 and $15.72 in
2020 and 2019, respectively. The total fair value of performance-based restricted stock awards vesting was approximately $0.6 million and $0.4 million in
2020 and 2019, respectively.
On November 10, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan in conjunction with the
appointment of the Company's Interim President and Chief Executive Officer where 90,000 shares were granted under the Plan, with 50,000 shares vesting
when, during the term of the employment agreement, the thirty-day volume weighted average price of a Company common share equals $8 per share or
more, and the remaining 40,000 shares vesting when, during the term of the employment agreement, the thirty-day volume weighted average price of a
Company common share equals $11 or more. The grant is contingent upon shareholder approval of an increase in the number of shares of our common
stock that may be issued pursuant to the 2015 Stock Awards Plan. Shareholders will vote on this matter at our 2021 Annual Meeting of Shareholders.
A summary of the status of our non-vested performance-based restricted stock awards as of December 31, 2020, and changes during fiscal 2020, were as
follows:
Units
(1)
Weighted-Average Grant
Date Fair Value
(2)
Outstanding December 31, 2019
Granted
(3)
Vested
Forfeited/Canceled
77,986 $
36,647 $
(64,711) $
(20,558) $
29,364 $
13.66
13.00
13.21
13.73
13.76
Non-vested December 31, 2020
(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, 2020, the maximum number of non-vested shares under the provisions of the
agreement was 44,046.
(2) Contingent shares have been excluded from the table above.
(3) Excludes the vesting of an additional 5,074 shares due to performance conditions of the awards exceeding target.
As of December 31, 2020, 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 2.12 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 December 18, 2020 and May 16, 2019,
non-employee directors received an aggregate of 43,063 and 15,909 shares, respectively, of restricted stock in lieu of total retainer fees of $345,000 and
$304,000, 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.
59
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 9: Income Taxes
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 assets and liabilities are as follows at the
respective year ends:
(in thousands)
Deferred income tax assets:
Inventory valuation reserves
Inventory capitalization
Accrued bonus
State net operating loss carryforwards
Federal net operating loss carryforwards
Equity security mark to market
Lease liabilities
Interest limitation carryforwards
Accrued Federal Insurance Contributions Act ("FICA") deferral
Intangible asset basis differences
Other
Total deferred income tax assets
Federal & State valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities:
Fixed asset basis differences
Prepaid expenses
Lease assets
Interest rate swap
Other
Total deferred income tax liabilities
Deferred income taxes
Significant components of the provision for income taxes are as follows:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
60
2020
2019
176
1,120
328
1,669
—
—
7,484
—
299
3,706
534
15,316
(4,243)
11,073
5,562
276
7,067
68
57
13,030
(1,957) $
2020
2019
(6,024) $
23
(6,001)
1,011
284
1,295
(4,706) $
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)
(10)
57
47
(833)
59
(774)
(727)
$
$
$
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)
Tax at U.S. statutory rates
State income taxes, net of federal tax benefit
Federal and State valuation allowance
CARES Act carryback benefits
Stock option compensation
Executive compensation limitation
Other nondeductible expenses
Other, net
Total
2020
2019
Amount
%
Amount
%
$
$
(6,714)
73
2,541
(1,123)
65
280
35
137
(4,706)
21.0 % $
(0.2)%
(7.9)%
3.5 %
(0.2)%
(0.9)%
(0.1)%
(0.5)%
14.7 % $
(790)
165
(60)
—
(155)
57
64
(8)
(727)
21.0 %
(4.4)%
1.6 %
— %
4.1 %
(1.5)%
(1.7)%
0.2 %
19.3 %
The Company made income tax payments of $16,000 and $1.2 million in 2020 and 2019, respectively. The Company has no U.S. Federal net operating loss
carryforwards and no interest limitation carryforwards at the end of 2020 compared with $0.7 million of U.S. Federal net operating loss carryforwards and
$3.5 million of interest limitation carryforwards at the end of 2019. During the current period, in response to the COVID-19 pandemic, the Coronavirus,
Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. Among various income and payroll tax provisions, the
CARES Act permitted the Company to carryback net operating losses realized in 2020 and 2019, refunding previous taxes paid over tax years 2014
through 2018, resulting in no U.S. Federal net operating loss carryforwards to 2021. This resulted in $1.1 million of income tax benefits realized in 2020
due to tax rate differentials between the tax years.
During 2020, the Company increased the combined U.S. federal and state valuation allowance by $2.5 million because it is not more likely than not that the
underlying deferred tax assets will be realized in the foreseeable future. While no U.S. federal net operating losses exist as of December 31, 2020, the
current year increase in the valuation allowance is principally related to deferred tax assets created in the current year associated with the impairment of
intangible assets. In addition, on a gross basis the Company had state operating loss carryforwards of $39.4 million and $43.6 million at the end of 2020
and 2019, respectively. The majority of these losses will expire between the years of 2021 and 2038, while certain losses are not subject to expiration. A
valuation allowance has been established for $39.4 million and $40.3 million of these state net operating losses at the end of 2020 and 2019, respectively,
or $1.7 million on an after-tax basis at each period.
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 2015 or state examinations for years before 2014.
The Company had no uncertain tax position activity during 2020 or 2019. 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 2020.
61
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 10: 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 $19,500 for 2020. Under the Economic Growth and Tax Relief Reconciliation
Act, employees who are age 50 or older could contribute an additional $6,500 per year for a maximum of $26,000 for 2020. 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 2020 and 2019 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 $0.4 million and $0.8 million were made for 2020 and 2019, 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 2020 or 2019.
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 $19,500 for 2020. Under the Economic Growth and Tax Relief Reconciliation Act,
employees who are age 50 or older could contribute an additional $6,500 per year for a maximum of $26,000 for 2020. During 2020, the Company
contributed three percent of a participant's eligible compensation from January to July and increased this amount to four percent for the remainder of the
plan year, regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were $0.2 million for 2020 and 2019,
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 2020 or 2019.
The Company maintains a Collective Bargaining Agreement (the "Munhall CBA") with the United Steel Workers of America, Local Union 5852-22 (the
"Munhall Union"), which represents the employees at the Munhall facility. 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 84 percent funded for the plan year ended December 31, 2019. Per the terms of the Munhall CBA the Company contributes 4.25 percent of
each participant's eligible compensation for the 2020 plan year. Munhall Union employees make no contributions to the Munhall Plan. The Company's
contributions are less than five percent of total contributions to the plan based on contributions for the plan year ended December 31, 2019. The Company's
contributions to the Munhall Plan totaled $0.2 million for the year ended December 31, 2020 and 2019, 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 $29,851 and $28,469 for 2020 and 2019, respectively.
Note 11: Leases
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 (“Store”), an affiliate of Store Capital Corporation
("Store Capital") that was entered into in 2016 and amended with the 2019 American Stainless acquisitions as well as the 2020 sale of land at the Munhall
facility. As of December 31, 2020, operating lease liabilities related to the master lease agreement with Store Capital totaled $32.9 million, or 98 percent of
the total lease liabilities on the consolidated balance sheet.
In determining the lease liability and corresponding right-of-use asset for its operating leases, the Company calculates the present value of future lease
payments using the interest rate implicit in the lease, when available, or the Company's
62
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
incremental borrowing rate ("IBR"). The Company determines the appropriate IBR by identifying a reference rate and making adjustments that take into
consideration financing options and certain lease-specific circumstances. Such adjustments include assuming the Store Capital lease would require two
lenders with the secondary lender being secured on a second lien requiring mezzanine rates. The Company utilizes 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.
On January 2, 2019, the Company and Store Master Funding XII, LLC, a Delaware limited liability company and the Company's sale-leaseback partner,
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 two percent.
On September 10, 2020, the Company and Store closed on a transaction pursuant to which Store sold to a third party approximately 12.5 acres of
unimproved land and immaterial improvements located at Synalloy’s facility in Munhall, Pennsylvania. Synalloy subleases the Munhall facility to Bristol
Metals, LLC.
As a result of the sale, on September 10, 2020, the Company and Store entered into a Third Amended and Restated Master Lease Agreement (the “Third
Master Lease”) to reduce the Company's rent at the Munhall facility pursuant to the terms and conditions of the Second Amended and Restated Master
Lease Agreement between the parties dated January 2, 2019. The Third Master Lease was determined to be a lease modification that qualified for a change
of accounting on the existing lease and not a separate contract. Upon modification of the Third Master Lease, the right-of-use asset and operating lease
liability were remeasured using an incremental borrowing rate determined on the date of modification. As such, the Company recognized a reduction in the
right-of-use asset and operating lease liability related to the Third Master Lease of $3.2 million and $3.4 million, respectively, and recognized a gain on the
modification of $0.2 million, which is reported within operating expenses on the consolidated statement of operations and comprehensive loss.
Weighted average discount rates for operating and finance leases are as follows:
Operating Leases
Finance Leases
Balance Sheet Presentation
Operating and finance lease amounts included in the consolidated balance sheet are as follows (in thousands):
Classification
Assets
Assets
Current liabilities
Current liabilities
Non-current liabilities
Non-current liabilities
Total Lease Cost
Financial Statement Line Item
Right-of-use assets, operating leases
Property, plant and equipment, net
Current portion of lease liabilities, operating leases
Current portion of lease liabilities, finance leases
Non-current portion of lease liabilities, operating leases
Non-current portion of lease liabilities, finance leases
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
8.33 %
2.44 %
December 31, 2020
31,769
56
867
19
32,771
37
December 31, 2020
4,124
92
24
4,240
$
$
$
63
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
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 and comprehensive loss.
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of December 31, 2020 are as follows:
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted minimum future lease payments
Imputed Interest
Total lease liabilities
Additional Information
Operating
Finance
$
$
3,610 $
3,665
3,699
3,549
3,619
43,540
61,682
28,044
33,638 $
20
15
15
8
—
—
58
2
56
15.47 years
2.91 years
Weighted average remaining lease terms for operating and finance leases as of December 31, 2020 are as follows:
Operating Leases
Finance Leases
During the year ended December 31, 2020, the Company had no right-of-use assets recognized in exchange for new operating lease liabilities.
Note 12: Commitments and Contingencies
Management is not currently aware of any asserted or unasserted matters which could have a material effect on the financial condition or results of
operations of the Company.
64
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 13: Loss Per Share
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except per share data)
Numerator:
Net loss
Denominator:
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
Net loss per share:
Basic
Diluted
2020
2019
(27,267) $
(3,036)
9,099
—
9,099
(3.00) $
(3.00) $
8,983
—
8,983
(0.34)
(0.34)
$
$
$
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 194,576 in 2020 and 300 in 2019, which were not included in the
diluted earnings per share calculation as their effect was anti-dilutive.
Note 14: 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, Palmer and Specialty. The Specialty Chemicals Segment operates as one reporting unit which includes MC and CRI Tolling.
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.
65
The following table summarizes certain information regarding segments of the Company's operations:
(in thousands)
Net sales
Metals Segment
Specialty Chemicals Segment
Operating (loss) income
Metals Segment
Specialty Chemicals Segment
Unallocated corporate expenses
Acquisition related costs
Proxy contest costs
Earn-out adjustments
Gain on lease modification
Operating loss
Interest expense
Change in fair value of interest rate swap
Other income, net
Loss 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
66
2020
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
204,459 $
51,541
256,000 $
(24,599) $
4,033
(20,566)
7,917
845
3,105
(1,195)
(171)
(31,067)
2,110
51
(1,255)
(31,973) $
141,799 $
25,039
40,146
206,984 $
8,883 $
1,552
165
10,600 $
1,761 $
866
1,121
3,748 $
51,541 $
154,974
23,670
5,503
20,312
256,000 $
248,470 $
7,530
256,000 $
251,078
54,090
305,168
3,692
2,811
6,503
8,357
601
—
(747)
—
(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
Note 15: Acquisitions
Acquisition of the Assets and Operations of American Stainless Tubing, Inc.
On January 1, 2019, ASTI completed the American Stainless Tubing, Inc. ("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 6).
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.
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
$
5,564 $
3,534
605
2,793
10,000
7,044
(6,148)
(1,400)
(97)
21,895 $
Revisions
Final
— $
—
—
—
(496)
714
(218)
—
—
— $
5,564
3,534
605
2,793
9,504
7,758
(6,366)
(1,400)
(97)
21,895
$
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.
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 24
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, 2020, the Company purchased 59,617 shares under the stock repurchase program at an average price of approximately
$10.65 per share for an aggregate amount of $0.6 million.
During the year ended December 31, 2019, the Company purchased no shares under the stock repurchase program.
67
As of December 31, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.
Shareholder Rights Plan
On March 31, 2020, the Board of Directors unanimously authorized the adoption of a limited duration shareholder rights plan expiring on March 31, 2021
and an ownership trigger threshold of 15%. In connection with the shareholder rights plan, the Board of Directors authorized and declared a dividend of
one right (each, a "Right") for each outstanding share of the Company's common stock, par value $1.00 per share ("Common Stock") to stockholders of
record at the close of business on April 10, 2020 (the "Record Date"). The complete terms of the Rights are set forth in a Rights Agreement dated March
31, 2020 (the "Rights Agreement"), by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The Rights will
become exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's outstanding Common Stock or announces a
tender or exchange offer that would result in beneficial ownership of 15% or more of the Company's Common Stock. Each Right would entitle the holder
to purchase from the Company one half of one share of Common Stock at a purchase price of $22.50 per right, subject to adjustments (equivalent to $45.00
for each whole share of Common Stock).
On June 27, 2020, the Company entered into Amendment 1 to the Rights Agreement (the "Amendment"). The Amendment terminated the Rights
Agreement by accelerating the expiration of the Rights to June 28, 2020. At the time of the termination of the Rights Agreement, all of the Rights, which
were distributed to holders of the Company's common stock, par value, $1.00, pursuant to the Rights Agreement, expired.
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 2020 and 2019, no dividends were declared or paid by the Company.
Note 17: Proxy Contest and Related Costs
During the six months ended June 30, 2020, the Company engaged in a proxy contest with Privet Fund Management, LLC ("Privet") and UPG Enterprises,
LLC ("UPG"), which parties acted as a group during the proxy contest. At the Company’s Annual Meeting of Shareholders held on June 30, 2020 (the
“Annual Meeting”), the Company’s independent shareholders voted the Company’s proxy card, resulting in five (of eight) incumbent Board members being
re-elected to the Board of Directors. Due to cumulative voting, a unique voting method permitted by the Company’s Certificate of Incorporation, Privet and
UPG were able to cumulate their group-owned shares to elect three (of eight) new directors at the Annual Meeting.
During the year ended December 31, 2020, total costs incurred by the Company relating to the proxy contest were $3.1 million.
Note 18: Subsequent Events
As discussed in Note 6, on January 15, 2021, the Company and its subsidiaries entered into a new Credit Agreement with BMO Harris Bank N.A. The new
Credit Agreement provides the Company with a new four-year revolving credit facility with up to $150.0 million of borrowing capacity. The Facility
refinances and replaces the Company's previous $100.0 million asset based revolving line of credit with Truist Bank, which was scheduled to mature on
December 21, 2021, and the remaining portion of the Company's five-year $20 million term loan with Truist, which was scheduled to mature on February
1, 2024. The initial borrowing capacity under the Facility totals $110.0 million.
On February 10, 2021, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management
employees of the Company where 15,181 shares with a market price of $8.575 per share were granted under the Plan. The stock awards vest in 20 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. The grants are contingent upon shareholder approval of an increase in the number of shares of our
common stock that may be issued pursuant to the 2015 Stock Awards Plan. Shareholders will vote on this matter at our 2021 Annual Meeting of
Shareholders.
68
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On February 17, 2021, the Board of Directors re-authorized the Company's stock repurchase program. The previous stock repurchase program had a term
of 24 months and terminated on February 21, 2021. This stock repurchase program allows for repurchase of up to 790,383 shares of the Company's
outstanding common stock over 24 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, if any, and the Company may discontinue purchases at any time that management
determines additional purchases are not warranted.
On February 17, 2021, the Board of Directors authorized the permanent closure of the Company's Palmer facility. The Company will cease operations and
divest all remaining assets at the facility. Costs associated with this closure cannot be determined at this time. This closure will not affect any of the
Company's other operating units.
69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of 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 December 31, 2020. 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.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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 2021 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 Susan S. Gayner, Jeffrey Kaczka and John P. Schauerman.
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. Jeffrey Kaczka 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 2021 Annual Meeting of
Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
70
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 2021 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, 2020 about all of the Company's equity
compensation plans.
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Plan Category
Total
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)
179,531 $
—
179,531
12.74
—
12.74
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
(1)
—
—
—
(1)
Represents shares remaining available for issuance under the 2015 Stock Awards Plan and the 2011 Plan.
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 2020, non-employee directors received an aggregate of $345,000 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
2020, seven non-employee directors each received an aggregate of 43,063 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
2021 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 2021
Annual Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
71
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this report:
PART IV
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, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2020 and 2019
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"
72
Item 16. Form 10-K Summary
None.
Schedule II Valuation and Qualifying Accounts
(in thousands)
Year ended December 31, 2020
Deducted from asset account:
Allowance for credit losses
Inventory reserves
Year ended December 31, 2019
Deducted from asset account:
Allowance for credit losses
Inventory reserves
Balance at
Beginning of
Period
Charged to
(Reduction of)
Cost and Expenses
Charged to
Other Accounts
Deductions
Balance at End of
Period
$
$
$
$
70 $
747 $
440 $
271 $
(a)
450
—
169 $
676 $
(171) $
1,767 $
(b)
72
—
$
$
$
$
(464) $
(300) $
— $
(1,696) $
496
718
70
747
(a) Amount charged to retained earnings upon adoption of ASC 326 on January 1, 2020.
(b) ASTI acquired reserve on January 1, 2019.
73
Index to Exhibits
Exhibit No.
from
Item 601 of
Regulation S-K
3.1
Description
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 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
10.8 Agreement between Registrant's Bristol Metals, LLC subsidiary and the United Steelworkers of America Local 4586, dated
August 1, 2019, incorporated by reference to Registrant's Form 10-K for the period ended December 31, 2019.
10.9 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 1375-18, dated July 1, 2020
10.10 Third Amended and Restated Loan Agreement, dated as of October 30, 2017, between Registrant and Branch Banking and Trust
(now Truist) ("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 Third Amendment to Third Amended and Restated Loan Agreement, dated as of July 31, 2020, between Registrant and BB&T,
incorporated by reference to Registrant’s Form 10-Q for the period ended June 30, 2020
10.14 Fourth Amendment to Third Amended and Restated Loan Agreement, dated as of August 13, 2020, between Registrant and
BB&T, incorporated by reference to Registrant’s Form 10-Q for the period ended June 30, 2020
10.15 Fifth Amendment to Third Amended and Restated Loan Agreement, dated as of October 23, 2020, between Registrant and BB&T,
incorporated by reference to Registrant’s Form 8-K filed on October 28, 2020
10.16 Credit Agreement, dated as of January 15, 2021, between Registrant and BMO Harris Bank N.A., incorporated by reference to
Registrant’s Form 8-K filed on January 19, 2021
74
10.17 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.
10.18 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.
10.19 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.
10.20 Employment Agreement, dated as of October 26, 2020, between Registrant and Christopher G. Hutter, incorporated by reference
to Registrant’s Form 8-K filed on October 28, 2020
10.21 Confidential Separation and Release Agreement, dated as of October 26, 2020, between Registrant and Craig C. Bram,
incorporated by reference to Registrant’s Form 8-K filed on October 28, 2020
10.22 Employment Agreement, dated as of February 5, 2021, between Registrant and Sally M. Cunningham, incorporated by reference
to Registrant's Form 8-K filed on February 5, 2021.
10.23 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
10.24 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
10.25 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
10.26 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
10.27 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
10.28 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
10.29 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.
10.30 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
10.31 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
10.32 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
10.33 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
10.34 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
10.35 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.
10.36 Amended and Restated Master Lease Agreement, 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.
75
10.37 Third Amended and Restated Master Lease Agreement, dated as of September 10, 2020, between Registrant and Store Master
Funding XII, LLC, incorporated by reference to Registrant’s Form 10-Q for the period ending September 30, 2020
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
104 Cover Page Interactive Data File (formatted as Inline XBRL document and included in Exhibit 101*)
* 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."
76
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.
By /s/ Christopher G. Hutter
Christopher G. Hutter
Interim President and Chief Executive Officer
(principal executive officer)
SYNALLOY CORPORATION
March 9, 2021
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/ Henry L. Guy
Henry L. Guy
Chairman of the Board
/s/ Susan S. Gayner
Susan S. Gayner
Director
/s/ Jeffrey Kaczka
Jeffrey Kaczka
Director
/s/ Amy J. Michtich
Amy J. Michtich
Director
/s/ Benjamin Rosenzweig
Benjamin Rosenzweig
Director
/s/ John P. Schauerman
John P. Schauerman
Director
/s/ Christopher G. Hutter
Christopher G. Hutter
Interim Chief Executive Officer and Director
/s/ Sally M. Cunningham
Sally M. Cunningham
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
March 9, 2021
Date
77
Exhibit 10.9
AGREEMENT
BETWEEN
SPECIALTY PIPE & TUBE, INC.
And
UNITED STEEL, PAPER AND FORESTRY, RUBBER MANUFACTURING, ENERGY,
ALLIED INDUSTRIAL AND SERVICE WORKERS INTERNATIONAL UNION
ON BEHALF OF LOCAL UNION 1375-18
EFFECTIVE JULY 1, 2020 THROUGH
JUNE 30, 2024
Exhibit 10.9
INDEX
AGREEMENT 3
ARTICLE I PURPOSE 3
ARTICLE II RECOGNITION 3-4
ARTICLE III UNION SHOP 4
ARTICLE IV CHECK-OFF 4-5
ARTICLE V NON-DISCRIMINATION 5-6
ARTICLE VI MANAGEMENT 6
ARTICLE VII RESPONSIBILITIES OF THE PARTIES 6-7
ARTICLE VIII ADJUSTMENT of GRIEVANCES and ARBITRATION 7-10
ARTIVLE IX EXPEDITED ARBITRATION 10-13
ARTICLE X SUSPENSION and DISCHARGE CASES 13-14
ARTICLE XI SENIORITY 14-16
ARTICLE XII MILITARY SERVICE 16
ARTICLE XIII HOURS OF WORK and OVERTIME 17-18
ARTICLE XIV REPORTING PAY 19
ARTICLE XV VACATIONS 20
ARTICLE XVI HOLIDAYS and SICK DAYS 21-22
ARTICLE XVII RATES OF PAY and JOB CLASSIFICATIONS 22-23
ARTICLE XVIII PENSION, HEALTH & WELFARE 23-25
ARTICLE XIX LEAVE OF ABSENCE 25
ARTICLE XX JURY DUTY 26
ARTICLE XXI FUNERAL and PERSONAL TIME 26
ARTICLE XXII WORK RULES 27
AFTICLE XXIII WAGES and JOB SECURITY 27-28
ARTICLE XXIV TERMINATION 28
ARTICLE XXV P.A.C. CHECK-OFF 29-30
SIGNATURE PAGE 30
2
Exhibit 10.9
AGREEMENT
This agreement dated July 1, 2017, by and between Specialty Pipe & Tube, Inc., 3600 Union Street, P.O. Box 516, Mineral
Ridge Ohio, or any successor (hereinafter Referred to as the “Company”), and the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) (hereinafter referred to
as the “Union”), 60 BLVD OF THE ALLIES, PITTSBURGH, PA. on behalf of its local 1375-18.
ARTICLE I PURPOSE
The purpose of the company and the Union in entering into this Labor Agreement is to set forth their agreement on rates of
pay, hours of work and other conditions of employment so as to promote orderly and peaceful relations with the
employees, to achieve uninterrupted operations in the plant and to achieve the highest level of employment performance
consistent with safety, good health and sustained effort.
ARTICLE II RECOGNITION
A. The Company recognizes the Union as certified by the National Labor Relations Board as the exclusive bargaining
agent for all production and maintenance employees, including truck drivers, operators and laborers employed by the
Company for the purposes of collective bargaining with respect to hourly rates of pay, wages, hours of work and other
conditions of employment.
B. The Company shall not negotiate nor make collective bargaining agreements for any of its employees in the
Bargaining Unit covered hereby unless it be through a duly-authorized representative of the Union.
3
Exhibit 10.9
A. The Company agrees that it will not sponsor or promote, financially or otherwise, any group or labor organization
for the purpose of undermining the Union; nor will it interfere, restrain, coerce, or discriminate against any of its
employees in connection with their membership in the Union.
ARTICLE III UNION SHOP
UNION MEMBERSHIP
a.
It shall be a condition of employment that all present employees of the Company covered by this Agreement,
who are members of the Union on the effective date of this Agreement, shall remain members of the Union in good
standing as a condition of employment. All present employees who are not members of the Union and all employees
who are hired hereafter shall become and remain members in good standing of the Union by signing the authorized
card for dues deduction as a condition of employment.
b. When the Company needs additional employees, the Company shall give the Union equal opportunity with
all other sources to provide suitable applicants, but the Company shall not be required to hire those referred by
the Union.
ARTICLE IV CHECK-OFF
A. The Company shall check off monthly dues, assessments and initiation fees, each as designated by the
International Treasurer of the Union, as membership dues in the Union on the basis of individually-signed voluntary
check-off authorization cards.
4
Exhibit 10.9
A. Deductions shall commence with respect to dues for the month in which the Company receives such
authorization card or in which such card becomes effective, whichever is later. Dues for a given month shall be
deducted from the first pay closed and calculated in the succeeding month.
B.
In the cases of earnings insufficient to cover deduction of dues, the dues shall be deducted from the next pay in which
there are sufficient earnings, or a double deduction shall be made from the first pay of the following month, provided
however the accumulation of dues shall be limited to two (2) months.
C. Monthly dues for each month shall be based on 1.45% plus .02 cents per hour and no more than 2-1/2 times the
average hourly earnings during an appropriate referenced pay period payable in the month in which said dues apply.
D. All deductions shall be promptly remitted to the International Treasurer of the Union, United Steelworkers, 60
BLVD OF THE ALLIES, Pittsburgh, Pennsylvania, 15222.
E. The Union shall indemnify and save the Company harmless against any and all claims, demands, suits or other forms of
liability that shall arise out of or by reason of action taken or not taken by the Company for the purpose of complying with
any of the provisions of this Article.
ARTICLE V
NON-DISCRIMINATION
A.
It shall be the continuing policy of the Company and the Union that the provisions of this Agreement shall be applied
to all employees without regard to race, color, religious creed, national origin, sex or age. The representatives of the Union
and the Company in all steps of the Grievance Procedure and in all dealings between the parties shall comply with this
provision.
5
Exhibit 10.9
A. A joint committee on civil rights shall be established at the Company, and this committee shall meet at mutually-
agreeable times. The Union members shall be certified to the Company by the Union, and the Company member shall be
certified to the Union.
ARTICLE VI MANAGEMENT
A. The Company retains the exclusive right and responsibility to manage the business and plants and to direct the
working forces. The Company, in the exercise of its rights, shall observe the provisions of this agreement.
B. The rights and responsibility to manage the business and plants and to direct the working forces include the right to
hire, suspend or discharge for proper cause, or transfer, and the right to relieve employees from duty because of lack of work
or for other just cause.
ARTICLE VII RESPONSIBILITIES of the PARTIES
A.
In addition to the responsibilities that may be provided elsewhere in this agreement, the following shall be observed:
a.
There shall be no strikes, work stoppages interruption or impeding of work. No officer or representatives of the
Union shall authorize, instigate, aid or condone any such activities.
No employee shall participate any such activities.
b.
There shall be no discrimination, restraint or coercion against any employee because of membership in
the Union.
6
Exhibit 10.9
a.
There shall be no interference with the right of employees to become members or continue membership in the
Union.
A. The applicable procedures of the agreement shall be followed for the settlement of all complaints and grievances.
B. The right of the Company to discipline an employee for a violation of this agreement shall be limited to the failure of
such employee to discharge his responsibilities as an employee and may not in any way be based upon the failure of such
employee to discharge his responsibilities as a representative or officer of the Union. The Union has the exclusive right to
discipline its officers and representatives. The Company has the exclusive right to discipline its officers and
representatives.
C.
There shall be no lock-outs.
ARTICLE VIII
ADJUSTMENT of GRIEVANCES and ARBITRATION
A. Should any differences arise between the Company and the employee as to the meaning and application of the
provisions of this Agreement, or should any dispute arise with regard to any established rate or new rates, or failure to
establish a job description or rate, such difference or dispute shall be resolved as herein provided, unless otherwise agreed
to in writing. Grievance meetings are to be scheduled during business hours and time(s) which are to be mutually agreed
upon. All lost time for Union officers for said meeting shall be borne by the Local Union.
B. The Company has the right to bring in witnesses who are excluded from the Bargaining Unit by the NLRB at any step
in the grievance procedure. The Union has the right to bring in witnesses who are included in the Bargaining Unit by the
NLRB at any step in the grievance procedure. However, no Company employee included in the Bargaining Unit by the
NLRB shall be forced to testify verbally or in writing against his principles.
7
Exhibit 10.9
A.
The following is the grievance procedure:
Step 1 – The employee shall take up his grievance immediately with his supervisor, with the grievance Chairperson
and/or grievance committeeperson(s) in an attempt to settle same promptly.
If a grievance is denied in Step 1 and if the grievance Chairperson or grievance committeeperson(s)
determines that it constitutes a grievance, it shall be appealed to Step
a.
To be considered in Step 2 of the grievance procedure, a grievance must be filed in writing with the supervisor
within (5) working days after its denial in Step 1. It shall be dated and signed by employee(s), Chairperson or
grievance committeeperson(s). The written grievance shall include such information and facts as may be an aide to
the Company and Union in arriving at a fair, prompt and informed decision.
Step 2 – Within ten (10) working days of the receipt of such appeal, a meeting shall be held between the Company’s
designated representatives and the representative to the International Union, certified to the Company in writing as
the Step 2 representative, the grievance Chairperson and a member of the grievance committee.
Minutes of the Step 2 meeting shall be prepared by the Company’s designated representative, who shall deliver
two (2) copies thereof to the International Union representative within ten (10) days after such meeting. Such minutes
shall conform to the following general outline:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Dates and place of meeting
Name and position of those present and those absent
Identifying number and description of each grievance discussed
Brief statement of Union’s position
Brief statement of Company’s position
Summary of the discussion
Decision reached by the Company
Statement by the Union as to whether the decision was accepted or rejected
8
Exhibit 10.9
The International Union representative shall sign such minutes, provided that if he or she should disagree with the
accuracy of such minutes, he or she shall set forth and sign his or her reasons for such disagreement, and the minutes, except
for such disagreement, shall be regarded as agreed to.
A.
Arbitration.
In the event a grievance is not settled in accordance with Article VIII – Adjustment of Grievances and Arbitration,
the matter shall be appealed within ten (10) days to an impartial arbitrator to be appointed by mutual agreement of the
parties hereto. If the parties cannot agree on an arbitrator within ten (10) calendar days after the appeal, either party may
request the American Arbitration Association, 17900 Jefferson Park Road, Middleburg Heights, Ohio 44130; Attention:
Tribunal Administrator, to designate an arbitrator or through FMCS. The arbitrator designated shall set the date for the
hearing at a neutral, mutually-agreed time. The decision of the arbitrator shall be final.
The expenses and fees incidental to the services of the arbitrator shall be paid equally by the Company and the
Union.
The arbitrator shall only have jurisdiction and authority to interpret or determine compliance with the provisions
of this agreement insofar as shall be necessary to the determination of such grievance appealed to the arbitrator, but the
arbitrator shall not have the authority to alter, in any way, the provisions of this Agreement.
Arbitration awards may be retroactive to, but not beyond, the date of occurrence.
The arbitrator shall render his or her decision within thirty (30) calendar days of the hearing.
9
Exhibit 10.9
A.
If this Agreement is violated by the occurrence of a lock-out, strike, work stoppage or interruption or impeding of
work, no grievance shall be discussed or processed by the company while such violation continues, and under no
circumstances shall any grievance concerning employees engaged in the violation be discussed or processed while such
violation continues.
B. The grievance Chairperson or committee members shall be allowed time off without loss of pay to attend meetings
other than grievance meetings with the Company representatives when such meetings are held during the regular working
hours. Time spent at such meetings shall be noted on the employee’s time card. Upon request duly made and subject to its
established rules, the Company shall grant at reasonable times to the International representative in charge of any grievance
process in Step 2 of the grievance procedure access to the Company for the purpose of investigating such grievance.
C.
Failure of the Company to reply to a grievance at any Step within the time limits shall be treated by the Union as an
unsatisfactory settlement of the grievance from which it shall accordingly proceed to the next step or arbitration.
ARTICLE IX EXPEDITED ARBITRATION
Notwithstanding any other provisions of this Agreement, the following expedited arbitration is hereby adopted. The
expedited arbitration procedure is designed to provide prompt and efficient handling of routine grievances. Expedited
Arbitration shall be utilized by mutual consent of the parties.
1. Where grievances concerning written reprimands or suspensions of five (5) days or less are to be arbitrated,
they shall be arbitrated in the Expedited Arbitration Procedure unless appropriate representatives of the parties agree
that such a grievance should be arbitrated in the regular arbitration procedure; provided, however, that where
grievances concerning any discipline involving concerted activity or multiple grievances arising
10
Exhibit 10.9
from the same event are to be arbitrated, they shall be arbitrated in the regular grievance procedure.
1. Where grievances concerning suspension of more than five (5) days are to be arbitrated they shall be
arbitrated in the regular arbitration procedure.
2. Notwithstanding the foregoing, appropriate representatives of the parties may agree that grievances
concerning suspensions of more than five (5) days discharge may be arbitrated in the Expedited Arbitration
Procedure.
3.
The Expedited Arbitration Procedure shall be implemented at the Company with due regards to the following:
a.
The Union shall appeal the grievance under this Expedited Arbitration after receiving the Step 2
answer; provided however either party within three (3) normal working days after the Step 2 answer, may
request a meeting with the Company and/or his or her Staff Representative and the Chairperson of the
grievance committee along with the grievance person involved in an effort to resolve the grievance before
arbitration. Within two (2) normal working days after such meeting, if the grievance is unresolved, the
Union shall appeal the grievance to an arbitrator under this Expedited Arbitration Procedure.
b. As soon as it is determined that a grievance is to be processed under this procedure, the parties shall,
within ten (10) days (excluding Saturdays, Sundays, and Holidays) from the written appeal to arbitration,
notify the designated arbitrator from a mutually-agreed panel of arbitrators. The designated arbitrator is that
member of the panel who, pursuant to a rotation system, is scheduled for the next arbitration hearing.
Immediately upon such notification, the designated arbitrator shall arrange a place and date for the hearing to
take place not more than ten (10) days thereafter. If the designated arbitrator is not available to conduct the
hearing within the ten (10) days, the next panel members in rotation
11
Exhibit 10.9
shall be notified until an available arbitrator is obtained. Those called but not available shall not be called again
until their names come back pursuant to the rotation system. The appeal shall include the date, time and place
for the hearing. Thereafter, the Rules Procedure for Expedited Arbitration shall apply.
1.
The hearing shall be conducted in accordance with the following:
a. The hearing shall be informal.
b. No briefs shall be filed or transcripts made.
c. There shall be no formal evidence rules.
d. Each party’s case shall be presented by a previously-designated representative. The designated
representatives shall be the Plant Manager or Superintendent for the Company and the Staff
Representative or Chairperson of the grievance committee for the Union.
e. The arbitrator shall have the obligation of assuring that all necessary facts and considerations are brought
before him or her by the representatives of the parties. In all respects, he or she shall assure that the
hearing is a fair one.
2.
The arbitrator shall issue a decision no later than forty-eight (48) hours after conclusion of the hearing
(excluding Saturdays, Sundays and Holidays). His or her decision shall be based on the records developed by
the parties before and at the hearing and shall include a brief written explanation of the basis for his or her
conclusion. These decisions shall not be cited as a precedent in any discussions at any step of the grievance or
arbitration procedure. The authority of the arbitrator shall be the same as that provided in the grievance and
arbitration section of the applicable agreement.
12
Exhibit 10.9
1.
Each party shall pay its own expenses, with the Company and the Union sharing equally the expenses and
compensation of the arbitrator.
Examples of matters which both parties would regard as routine:
a. Qualification for holiday pay
b. Removal from job – inability to advance
c.
d.
Improper lay-off on cutback or recall
Improper lay-off assignment of overtime
e. Safety on an individual basis
f. Reporting pay
g. Prior related experience
h. Ability on job performance
i. Non-Bargaining Unit employee performing Bargaining Unit work
j.
Individual cases of temporary transfers
k.
Interpretation and application of Local Memorandums
l. Matters pertaining to jury duty and funeral allowance
Tribunal Administrator
American Arbitration Association 17900 Jefferson Park Road
Middleburg Heights, Ohio 44130
ARTICLE X SUSPENSION and DISCHARGE
CASES
A. The Company agrees that no employee, other than a probationary employee, shall be discharged preemptorily and that
in all instances in which the Company believes that discharge is justified, the Company shall notify the employee in writing
of its intention to suspend or discharge with a statement as to the reason for such intended action. A copy of such notice shall
be given to the grievance Chairperson and member of the grievance committee; within three (3) days from date of notice, the
employee shall be granted a hearing. If the employee affected
13
Exhibit 10.9
believes his proposed suspension or discharge is unfair or unjust, he may request and shall be granted during this period a
hearing and discussion of the offense before representatives designated by the Company with his grievance
committeeperson and/or the Chairperson of the grievance committee.
At such hearing, the facts and circumstances concerning the matter shall be fully disclosed to and by both parties.
Within two (2) days after such hearing, the Company shall make known whether the suspension shall be extended,
revoked, modified, or converted into a discharge. In the event such disposition is unsatisfactory to the employee(s), within
three (3) normal working days after notice of such action, he shall file a grievance in Step 2 of the grievance procedure and
process it in accordance with Article VIII – Adjustment of Grievances and Arbitration.
The provisions of this Section apply to all suspensions which are made in contemplation of discharge. Other
disciplinary suspensions shall be subject to processing through the regular grievance procedure.
ARTICLE XI SENIORITY
a.
Seniority rights shall prevail at all times on a plant-wide basis. Promotional opportunities and job security
should increase in proportion to length of continuous service and in administration of this Article, the intent shall be to
give full consideration for continuous service.
b.
c.
Company continuous service shall be used for all purposes in which a measure of service is utilized.
The following factors listed below shall be considered the determining factors for promotion, training for a
promotion, decrease in forces, lay-offs and recalls after lay-off:
i.
ii.
Continuous service
Physical ability
iii.
Possess skill and ability
14
Exhibit 10.9
a.
Continuous service shall be calculated from the date of first employment or re- employment following a
break in continuous service in accordance with the following provisions of this Section D. There shall be no
deduction for any time lost which does not constitute a break in continuous service. Continuous service shall be
broken if:
i.
ii.
The employee(s) quits.
The employee(s) is discharged for proper and just cause
iii.
Absence due to lay-off or disability or both which continues for more than two (2) years, provided,
however, employees injured while on duty shall accumulate credit for continuous service until the
termination of the period for which statutory compensation is payable.
iv. When recalled from a lay-off, the employee fails to report for work within ten
(10) work days after receipt of recall notice sent certified mail or mailo-gram to his last-known address,
unless the employee has a valid reason for failing to report for work.
A foreman shall perform no work of the type customarily performed by employees within the Bargaining
Unit, except when necessary due to emergencies, or for the purpose of instructing or training employees,
or when an operator requests that the foreman help him handle a particular job.
b. PROBATIONARY PERIOD
A new employee shall not accrue seniority rights for the first ninety (90) days, and termination of employment shall
be at the sole discretion of the Company. After the new employee has served his ninety (90) work day probationary
period, his seniority shall date as of his original hiring date. The Union shall indemnify and save the Company
harmless by an action or non-action by the Company regarding this Section A.
15
Exhibit 10.9
a.
Instead of decreasing the force prior to the commencement of any monthly paid period, Management shall, as
to any employee or group of employees, seek concurrence of the grievance committee to divide work on a
proportional pay basis. In the event of disagreement, Management shall not schedule the employees on a basis of less
than forty
(40) hours per week, but shall reduce the force.
ARTICLE XII MILITARY SERVICE
a.
Employees who are required to enter annual military training duty or temporary special service as a member of
a reserve component of the United States Armed Forces shall be entitled to make-up pay, not to exceed two (2)
weeks, after presenting due proof of the difference between his hourly rate of pay and the total amount received for
such service from the United States Armed Forces, during the period covered by this Agreement.
b.
EMPLOYMENT RIGHTS
The Company shall accord to each employee who applies for re-employment after conclusion of his one (1)
term of military service with the United States such re- employment rights as he shall be entitled to under the existing
statutes.
c.
TRAINING
Reasonable programs of training shall be employed in the event employees do not qualify to perform the
work on the job which they might have attained except for absence in such service.
16
Exhibit 10.9
ARTICLE XIII
HOURS OF WORK and OVERTIME
A. The normal work week shall consist of five (5) eight (8) hour days, exclusive of lunch, Monday through Friday
inclusive. The purpose of this Article is to define the normal work week for the purpose of computing overtime and
shall not be construed as a guarantee of hours of work.
B. The normal work day shall be eight (8) hours, to include a twenty (20) minute paid lunch break.
C. Employees shall be granted shift preference on the basis of their seniority, provided the efficient operation of
the plant is not impaired thereby, at the discretion of the Company.
D. Standard start times will be between the hours of 5:00 am and 9:00 am. In the event of a change to standard
start times, employees will receive notification no later than noon on the previous day. Start time(s) outside the
standard start time(s) are to be mutually agreed upon.
E.
OVERTIME
Any time worked over eight (8) hours per day shall be classified as overtime and be paid for at the rate of one
and one-half (1-1/2x) times the regular rate.
a. Any time worked over forty (40) hours in a payroll week shall be classified as overtime and paid for at
the rate of one and one-half (1-1/2x) the regular rate.
b.
In the event the Company specifically asks employee(s) to stay beyond 8 hours in a given day, the
Company will pay one full hour of overtime pay for any time worked between eight (8) hours and nine
(9) hours on a given day.
17
Exhibit 10.9
Any time worked beyond nine (9) hours in a given day will be paid on a pro- rated basis.
a. Overtime at the rate of two (2x) times the regular rate of pay shall be paid for:
i.
ii.
Sunday
Holiday
A. There shall not be more than (1) premium paid for the same hours worked (no pyramiding of overtime).
Daily Overtime Definition: Overtime determination and notification will be made to employees two (2) hours
before the end of an employees’ shift on the same day in which the daily overtime needs to be performed. When notice is
given concerning daily overtime two (2) hours before the end of an employees’ shift, first choice of daily overtime work
shall be based on seniority of employees presently working the shift. In the event overtime is declined it is then assigned by
inverse seniority within rotation upon the least senior employee in rotation. The Union will accept responsibility for
administering and record keeping of the rotation.
Scheduled Overtime Definition: Overtime determination, scheduling and notification will be made no later than
noon the previous workday. Overtime will then become part of the employees regularly scheduled workday.
First choice for scheduled overtime work shall be given to the employee based on seniority. In the event all employees
were to decline the overtime opportunity, scheduled overtime will then be assigned on the inverse order of seniority and
becomes part of the employees regularly scheduled workday.
If overtime has been declined by the full workforce, whether it was daily overtime or scheduled overtime, then overtime will
be forced to the junior employee that is qualified to perform the job. Employees refusing under such circumstances to
perform overtime work will be subject to the Attendance Policy.
18
Exhibit 10.9
ARTICLE XIV REPORTING PAY/CALL-OUT
PAY
A. Unless having been notified not to report, any employee who reports for work in accordance with employee’s
schedule and upon arrival at the Company finds no work available for which he was scheduled shall be paid four
(4) hours at his hourly rate. If the Company offers other employment for that day, it shall be no less than eight (8)
hours at the rate of the job or the employee’s regular rate, whichever is the highest. This provision shall not apply
where lack of work is due to an Act of God, power failure, or other causes beyond the control of the Company.
B. Employees which are not scheduled or employees who have been recalled back to work following his/her
regularly scheduled shift shall receive show-up pay of (4) four hours at the applicable rate.
C. Employees who have been mandated to work over their scheduled shift shall receive a minimum of (1) one hour
of pay at the applicable rate.
19
Exhibit 10.9
ARTICLE XV VACATIONS
A. All employees covered under this Agreement who have been employed for the first full year shall be entitled to
vacation time off and vacation pay as indicated below:
Years of Service
1 but less than 2
2 but less than 8
30 years or more
8 but less than 15
15 but less than 30
Duration of Vacation
1 week
2 weeks
3 weeks
4 weeks
5 weeks
Vacation Pay
40 hours at base rate
80 hours at base rate
120 hours at base rate
160 hours at base rate
200 hours at base rate
The weekly vacation pay shall be based on the employee’s straight-time rate of pay.
Vacation shall be taken from January 1 to December 31. Vacation times shall be arranged by the Company with
consideration given to seniority and business requirements, but the Company shall have the exclusive final right to designate
vacation periods. The company may elect to close its plant for vacation after notifying the Union thirty (30) days in advance
of the shutdown or should business be such that vacations would not be practical, the employee may be asked to take pay in
lieu of vacation. Subject to the foregoing limitation, it is the intent of this Article that all employees wishing to take
vacations shall be permitted to do so.
Employees may elect to utilize a day at a time vacation beginning the second day of a sickness. For each of the three (3)
sick occurrences (referenced as three (3) sick days in Article XVI, Item
B)
the employee may use no more than two (2) vacation days (a day at a time) per sick occurrence, up to a maximum
utilization of four (4) vacation days in totality within a calendar year (Jan 1 – Dec 31)
20
Exhibit 10.9
ARTICLE XVI HOLIDAYS AND SICK DAYS
a. Recognized legal Holidays shall be the following:
New Years’ Day Good Friday Memorial Day
Fourth of July Labor Day Thanksgiving Day
Friday after Thanksgiving Christmas Eve
Christmas Day
b. Sick Days – Employees will earn sick days based on the following schedule:
Year one: One (1) sick day awarded upon completion of one (1) year of service Year two: Two (2) sick days
awarded upon completion of two (2) years of service Year three and beyond: Three (3) sick days awarded
upon completion of three (3) years of service.
These days are intended for the employee to use specifically for sick days, doctor visits, and associated
health-related issues. Sick days are not to be considered vacation days. Unused sick days may not be carried
forward to the following year.
c.
In order to be eligible for such holiday pay, the employee must work the full regularly scheduled workday before
and the fully regularly scheduled workday after such holiday. If excused by the Company from the before and
after provision, the employee must work sometime during the seven (7) calendar days preceding the
21
Exhibit 10.9
holiday and must have been an employee of the Company for forty-five (45) calendar days previous to the
holiday. If a holiday falls within an employee’s vacation period, such holiday shall not be considered as part of
the vacation period, and the employee shall receive his full vacation in addition to holiday pay as hereinbefore
provided.
Any holiday which falls on a Sunday shall be celebrated on the following Monday. Any holiday which falls on
a Saturday shall either be observed on the preceding Friday or be granted in the form of an additional day’s pay,
or be observed on the following Monday, at the employer’s discretion. Holidays not worked shall be paid for at
the employee’s base hourly rate for eight (8) hours. Holidays worked shall be paid for at the rate of two (2x)
times the regular rate of pay for all hours worked, in addition to the regular holiday pay.
ATTENDANCE BONUS – PERFECT ATTENDANCE
On July 1 of each calendar year of the existing Agreement now in effect, a bonus will be given if there has been no
lost time, tardiness, sickness, etc. Employee will receive one (1) week’s pay. Employee will receive an additional one-half
(1/2) week’s pay for perfect attendance for the life of this Agreement. Employees’ whom elect not to utilize vacation during
unpaid Holidays shall not be adversely affected.
ARTICLE XVII
RATES OF PAY and JOB CLASSIFICATION
A.
The Union and the Company agree that the job classification and schedule of hourly rates in this Agreement
shall be used as a basis of determining rates of pay for the duration of this Agreement.
22
Exhibit 10.9
A.
When the Company establishes a new job classification or substantially changes an existing job
classification, the Company shall set the rate for such new or changed classification, subject to the right of the Union
to challenge the established rate through the grievance procedure. Any new or changed rate established by the
Company shall become final if the Union fails to file a grievance with respect to such new or changed rate within sixty
(60) days after its establishment.
ARTICLE XVIII PENSION HEALTH and
WELFARE
a. PENSION
Effective July 1, 1994, an employee who has been on the Payroll ninety (90) days or more will have a
percentage of the employee’s compensation contributed by the Company to employee’s pension plan. The
percentage has been agreed upon by both parties.
Effective 7/1/2020 7%
Effective 7/1/2021 7%
Effective 7/1/2022 7%
Effective 7/1/2023 7%
Each employee shall have an individual account and account number.
Each employee shall have the right to designate his own beneficiary, whoever that person may be.
The Union shall, as the designated Bargaining Agent, ensure that whatever Plan is agreed upon is done
properly.
Reports will be made quarterly, with each employee receiving his own individual
report.
23
Exhibit 10.9
As an added measure, each employee shall be given an original Plan that was mutually agreed upon by
the parties.
The Company, the Local Union grievance, chairperson and grievance committee shall be the trustees of the
account.
Based on a forty (40) hour week.
a. HEALTH and WELFARE
The Company will pay the full monthly amount for hospitalization and benefits that Employees now have
under this agreement. Each employee hired before July 1, 2010, will contribute a percentage of their total benefits
premium according to the following schedule; deductions are bi-weekly and will be adjusted when premiums change:
Effective 07-01-2020 – 20.0% - of the total Benefit Premium Effective 07-01-2021 –
20.5% - of the total Benefit Premium Effective 07-01-2022 – 21.5% - of the total Benefit
Premium Effective 07-01-2023 – 22.5% of the total Benefit Premium
Any employee hired on or after July 1, 2010 shall pay a flat 25% of the total Benefit Premium.
The Company agrees that if, during the life of this agreement, it sells, leases, transfers or assigns the operations
covered by this agreement the Company shall obligate the purchaser, lessee, transferee or assignee to provide substantially
equivalent wages and benefits while assuming all the remainder of the obligations of the agreement until its expiration date.
24
Exhibit 10.9
If an employee is absent because of illness or off-the-job injury and notifies the employer of such absence, the
employer shall continue to make the required contributions above specified for as long as such injury or illness continues
and cause the employee to be absent from work, but not to exceed a period of four (4) weeks in any one (1) year or until the
employee returns to work, whichever occurs sooner. If an employee is absent because of lay-off, the employer shall continue
to make the required contributions for health care for three (3) months. An employee granted a leave of absence who desires
continuing coverage during such leave shall make his own arrangements to pay the required contribution in order to
maintain coverage. The employer shall inform the Union and the administrator of the Health and Welfare Fund of the name
of any employee granted a leave of absence, and the purported reason therefore, at the time such leave is granted. Casual or
spot labor shall not be covered by this Article.
The Company shall provide a Short Term Disability benefit through the Health and Welfare Fund which shall be 60% of
weekly earnings up to $500.00 a week for 26 weeks per the plan.
INSURANCE COMMITTEE
The Company mutually agrees to have at least two (2) employees check and review, along with the Company,
insurance plan benefits.
ARTICLE XIX LEAVE of ABSENCE
A. Any employee desiring leave of absence from his employment shall secure written permission from the
employer. The maximum leave of absence shall be for thirty
(30) days and may be extended for like periods. Permission for extension must be secured from both the Union and
the employer. During the period of absence, the employee shall not engage in gainful employment; failure to
comply with this provision shall result in the complete loss of job for the employee involved.
25
Exhibit 10.9
ARTICLE XX JURY DUTY
A. Any member who is required to serve on a jury shall be paid the difference between jury duty pay and his
normal day’s full pay for each day spent while on jury duty. However, the employee will be required to report
promptly for work during any day in which his service as a juror does not require his attendance in court.
ARTICLE XXI FUNERAL AND PERSONAL
TIME
A. Any employee who is absent from work in order to attend the funeral of the employee’s spouse, mother,
father, sister, brother, step-brother, step-sister, mother-in-
law, father-in-law, child, grandparent, step-child, step-mother or step-father shall receive pay for time thus lost, not to
exceed two (2) days of eight (8) hours of pay per day in-state or three (3) days out-of-state; provided however, the
missed days are working days. The pay shall be regular work pay.
B. Each employee shall be entitled to two (2) personal days each year at regular work pay rate. New employees
shall not receive the first personal day until after completion of six (6) months of employment and shall receive
the second personal day after completion of one (1) year.
26
Exhibit 10.9
ARTICLE XXII WORK RULES
A. The plant rules and attendance policy have been reviewed by the parties and shall remain in place for the term of
the agreement.
ARTICLE XXIII WAGES
• Effective 07-01-2020 $1,400.00 Lump sum payment in lieu of wage increase
• Effective 07-01-2021 2 % increase to $25.53
• Effective 07-01-2022 1 ¾ % increase to $25.98
• Effective 07-01-2023 1 ¾ % increase to $26.43
NEW HIRES
Any employee hired after the ratification of this agreement shall be paid the following:
◦
◦
◦
◦
70% of pay rate on first day of employment
80% of pay rate on year 1 anniversary
90 % of pay rate year 2 anniversary
100% of pay rate on year 3 anniversary
27
Exhibit 10.9
BREAKS AND LUNCHES
The Parties agree that Breaks and Lunches shall be administrated and taken in a manner consistent with the
prevailing practices of the location with regards to quantity and duration.
ARTICLE XXIV TERMINATION
This Agreement, effective July 1, 2020, shall be in effect until midnight June 30, 2024.
Any party to this agreement shall provide a signed, written notice ninety (90) days before the termination day of its
desire or intention to negotiate with respect to the terms and conditions of a new Agreement, including wages, vacations,
holidays, insurance, health benefits, pensions and conditions of employment, etc.
Any notice shall be given by certified mail and if by the Company, be addressed to the United Steelworkers
(USW), 60 BLVD OF THE ALLIES, PITTSBURGH, PA and if by the Union, and be addressed to Specialty Pipe &
Tube, Inc., 3600 Union Street, P.O. Box 516, Mineral Ridge, Ohio 44440.
28
Exhibit 10.9
ARTICLE XXV P.A.C. CHECK-OFF
The Company agrees that it will check-off and transmit to the Secretary-Treasurer of the United Steelworkers (USW)
Political Action Committee (USWPAC) voluntary contributions to the USW Political Fund from the earnings of those
employees who voluntarily authorize such contributions, which shall be specified in such forms and in conformance with an
applicable state or Federal statute.
The signing of such USW PAC check-off form, which is made part of this Agreement and marked as Appendix
“A”, and the making of such voluntary annual contributions are not a condition of membership in the Union or of
employment with the Company.
The United Steelworkers of America Political Action Committee supports various candidates for Federal and
other elective office, is connected with the United Steelworkers of America, a labor organization, and solicits and accepts
only voluntary contributions which are deposited in an account separate and segregated from the dues fund of the Union,
in its own fund-raising efforts and in joint fund-raising efforts with the AFL-CIO and its Committee on Political
Education.
The Union shall indemnify and save the Company harmless against all claims, demands, suits or other forms of
liability that shall arise out of, or by reason of action taken or not taken, by the Company by reason of the above check-off
provision.
29
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and signed by
their duly-authorized representatives this 1st day of July, 2020.
Exhibit 10.9
SPECIALTY PIPE & TUBE UNITED STEELWORKERS-USW AFL-CIO-CLC
Steve Baroff Tom Conway
President International President
Mark McAllister John E. Shinn
Inside/Outside Sales Manager International Secretary-Treasurer
Sally Cunningham David R. McCall
VP Corporate Administration Int’l Vice President Administration
Jenny Patrick Fred Redmond
HR Manager Int’l Vice President Human Affairs
Donald E. Blatt
District 1 Director
Jose Antonio Arroyo, BSAS
USW Staff Representative
David Jett
Unit Chairman, USW LU 1375-18
Kyle Blake
Negotiating Committee, USW LU 1375-18
30
Synalloy Corporation
Exhibit 21 Subsidiaries of the Registrant
All of the Company's subsidiaries are wholly owned. All subsidiaries are included in the Company's consolidated financial statements. The subsidiaries are
as follows:
Synalloy Metals, Inc., a Tennessee corporation
Bristol Metals, LLC, a Tennessee limited liability corporation
Manufacturers Soap and Chemicals Company, a Tennessee corporation
Manufacturers Chemicals, LLC, a Tennessee limited liability corporation
Synalloy Fabrication, LLC, a South Carolina limited liability corporation
Palmer of Texas Tanks, Inc., a Texas corporation (formerly Lee-Var, Inc.)
CRI Tolling, LLC, a South Carolina limited liability corporation
Specialty Pipe & Tube, Inc., a Delaware corporation
American Stainless Tubing, LLC, a North Carolina limited liability corporation
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Synalloy Corporation:
We consent to the incorporation by reference in the registration statements No. 333-230447 on Form S-3 and No. 333-188937 on Form S-8 of Synalloy
Corporation of our report dated March 9, 2021, with respect to the consolidated balance sheets of Synalloy Corporation as of December 31, 2020 and 2019,
the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years then ended, and the
related notes and financial statement Schedule II, which report appears in the December 31, 2020 annual report on Form 10‑K of Synalloy Corporation.
/s/ KPMG LLP
Richmond, Virginia
March 9, 2021
Exhibit 31.1
CERTIFICATIONS
I, Christopher G. Hutter, certify that:
1. I have reviewed this annual report on Form 10-K of Synalloy Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for
the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date:
March 9, 2021
/s/ Christopher G. Hutter
Christopher G. Hutter
Interim Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Sally M. Cunningham, certify that:
1. I have reviewed this annual report on Form 10-K of Synalloy Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for
the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date:
March 9, 2021
/s/ Sally M. Cunningham
Sally M. Cunningham
Chief Financial Officer
Certifications Pursuant to 18 U.S.C. Section 1350
The undersigned, who are the chief executive officer, the chief financial officer and the principal accounting officer of Synalloy Corporation, each
hereby certifies that, to the best of his knowledge, the accompanying Form 10-K of the issuer fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and that information contained in the report fairly presents, in all material respects, the financial condition
and results of operations of the issuer.
Exhibit 32
Date:
March 9, 2021
/s/ Christopher G. Hutter
Christopher G. Hutter
Interim Chief Executive Officer
/s/ Sally M. Cunningham
Sally M. Cunningham
Chief Financial Officer