synl-20220331

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2022


☐			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

57-0426694

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1400 16th Street,

Suite 270,

Oak Brook,

Illinois

60523

(Address of principal executive offices)

(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	Trading Symbol	Name of exchange on which registered
Common Stock, par value $1.00 per share	SYNL	NASDAQ Global Market

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, smaller reporting company or 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

☐

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x

The number of shares outstanding of the registrant's common stock as of May 9, 2022 was 10,239,998

Synalloy Corporation

Table of Contents



PART I. FINANCIAL INFORMATION
Disclosure Regarding Forward Looking Statements		3
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	4
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Note 1: Basis of Presentation	8
	Note 2: Acquisitions	9
	Note 3: Revenue Recognition	10
	Note 4: Fair Value of Financial Instruments	10
	Note 5: Inventories	12
	Note 6: Property, Plant and Equipment	13
	Note 7: Intangible Assets and Deferred Charges	13
	Note 8: Long-term Debt	14
	Note 9: Leases	15
	Note 10: Shareholders' Equity	16
	Note 11: Earnings Per Share	17
	Note 12: Income Taxes	17
	Note 13: Commitments and Contingencies	17
	Note 14: Industry Segments	18
	Note 15: Subsequent Events	19
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29

	Signatures	30

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other applicable federal securities laws. All statements that are not historical facts are forward-looking statements. Forward looking statements can be identified through the use of words such as "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions. 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; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw material availability; financial stability of the Company’s 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 acquisitions; environmental issues; negative or unexpected results from tax law changes; inability to comply with covenants and ratios required by the Company’s debt financing arrangements; and other risks detailed from time-to-time in Synalloy Corporation's Securities and Exchange Commission filings, including our Annual Report on Form 10-K, which filings are available from the SEC. Synalloy Corporation assumes no obligation to update any forward-looking information included in this release.

Part I - Financial Information

Item 1. Financial Statements

SYNALLOY CORPORATION

Condensed Consolidated Balance Sheets

(in thousands, except par value and share data)


	(Unaudited)
	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	1,241	$	2,021
Accounts receivable, net of allowance for credit losses of $456 and $216, respectively	67,819		50,126
Inventories, net	112,114		103,249
Prepaid expenses and other current assets	3,808		3,728
Assets held for sale	797		855
Total current assets	185,779		159,979
Property, plant and equipment, net	42,720		43,720
Right-of-use assets, operating leases, net	30,431		30,811
Goodwill	12,637		12,637
Intangible assets, net	13,661		14,382

Deferred charges, net	278		302
Other non-current assets, net	4,127		4,171
Total assets	$	289,633	$	266,002

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	44,268	$	32,318
Accounts payable - related parties	2		2
Accrued expenses and other current liabilities	13,609		12,407
Current portion of long-term debt	2,464		2,464
Current portion of earn-out liabilities	891		1,961
Current portion of operating lease liabilities	1,140		1,104
Current portion of finance lease liabilities	248		233

Total current liabilities	62,622		50,489
Long-term debt	68,610		67,928

Long-term portion of operating lease liabilities	31,748		32,059
Long-term portion of finance lease liabilities	1,362		1,414
Deferred income taxes	2,861		2,433
Other long-term liabilities	76		89
Total non-current liabilities	104,657		103,923

Commitments and contingencies – See Note 13

Shareholders' equity:
Common stock, par value $1 per share; authorized 24,000,000 shares; issued 11,085,000 shares	11,085		11,085
Capital in excess of par value	46,028		46,058
Retained earnings	73,340		63,080
	130,453		120,223
Less: cost of common stock in treasury - 861,605 and 918,471 shares, respectively	8,099		8,633
Total shareholders' equity	122,354		111,590
Total liabilities and shareholders' equity	$	289,633	$	266,002

Note: The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date. See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
Net sales	$	116,218	$	69,778
Cost of sales	93,722		61,043
Gross profit	22,496		8,735

Selling, general and administrative	8,646		6,869
Acquisition costs and other	531		—
Proxy contest costs and recoveries	—		(464)
Earn-out adjustments	102		225



Operating income	13,217		2,105
Other expense (income)
Interest expense	403		387
Loss on extinguishment of debt	—		223
Change in fair value of interest rate swaps	—		(2)
Other, net	(35)		162
Income before income taxes	12,849		1,335
Income tax provision	2,589		241




Net income	$	10,260	$	1,094















Net income per common share:
Basic	$	1.00	$	0.12
Diluted	$	0.99	$	0.12

Weighted average shares outstanding:
Basic	10,209		9,191
Dilutive effect from stock options and grants	111		97
Diluted	10,320		9,288

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Three Months Ended March 31,
	2022		2021
Operating activities
Net income	$	10,260	$	1,094
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense	2,116		1,817
Amortization expense	721		680


Amortization of debt issuance costs	25		21
Loss on extinguishment of debt	—		223

Deferred income taxes	428		(41)


Earn-out adjustments	102		225
Payments on earn-out liabilities in excess of acquisition date fair value	(372)		—
Provision for losses on accounts receivable	240		12
Provision for losses on inventories	496		184
Loss on disposal of property, plant and equipment	(5)		28
Non-cash lease expense	107		124


Change in fair value of interest rate swap	—		(2)
Issuance of treasury stock for director fees	254		—
Stock-based compensation expense	132		187
Changes in operating assets and liabilities:
Accounts receivable	(17,933)		(11,181)
Inventories	(9,302)		(3,866)
Other assets and liabilities	(27)		38
Accounts payable	11,950		6,357
Accrued expenses	(959)		(569)
Accrued income taxes	2,161		3,901
Net cash provided by (used in) operating activities	394		(768)
Investing activities
Purchases of property, plant and equipment	(1,117)		(245)
Proceeds from disposal of property, plant and equipment	5		18



Net cash used in investing activities	(1,112)		(227)
Financing activities
Borrowings from long-term debt	122,068		14,730
Proceeds from exercise of stock options	118		—
Payments on long-term debt	(121,386)		(12,333)
Principal payments on finance lease obligations	(62)		(10)

Payments on earn-out liabilities	(800)		(1,029)
Payments for termination of interest rate swap	—		(46)

Payments of deferred financing costs	—		(155)
Net cash (used in) provided by financing activities	(62)		1,157
(Decrease) increase in cash and cash equivalents	(780)		162
Cash and cash equivalents at beginning of period	2,021		236
Cash and cash equivalents at end of period	$	1,241	$	398

Supplemental disclosure
Cash paid for:
Interest	$	317	$	315
Income taxes	$	2	$	—

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statement of Shareholders' Equity (Unaudited)

(in thousands)


	Three Months Ended March 31, 2022

	Common Stock			Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
	Shares	Amount
Balance December 31, 2021	11,085	$	11,085	$	46,058	$	63,080	$	(8,633)	$	111,590
Net income	—	—		—		10,260		—		10,260
Issuance of 43,082 shares of common stock from treasury	—	—		(151)		—		405		254
Exercise of stock options for 13,784 shares, net	—	—		(11)		—		129		118
Stock-based compensation	—	—		132		—		—		132
Balance March 31, 2022	11,085	$	11,085	$	46,028	$	73,340	$	(8,099)	$	122,354

See accompanying notes to condensed consolidated financial statements.


	Three Months Ended March 31, 2021

	Common Stock			Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
	Shares	Amount
Balance December 31, 2020	10,300	$	10,300	$	37,719	$	42,835	$	(10,559)	$	80,295
Net income	—	—		—		1,094		—		1,094
Issuance of 25,363 shares of common stock from treasury	—	—		(238)		—		238		—
Stock-based compensation	—	—		187		—		—		187

Balance March 31, 2021	10,300	$	10,300	$	37,668	$	43,929	$	(10,321)	$	81,576

See accompanying notes to condensed consolidated financial statements.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unless indicated otherwise, the terms "Company," "we," "us," and "our" refer to Synalloy Corporation and its consolidated subsidiaries.

Note 1: Basis of Presentation

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report"). The financial results for the interim periods may not be indicative of the financial results for the entire year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP required management to make estimates and judgments that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

COVID-19 Update

The COVID-19 pandemic and related responses by public health and governmental authorities to contain and combat the outbreak and spread have adversely affected many economic sectors, significantly disrupted the global supply chain and fueled producer price and consumer inflation. During the first quarter of 2022, aspects of the Company's business continued to be affected by macroeconomic factors related to the COVID-19 pandemic, specifically with labor shortages at our plants and other areas of our business. We continue to experience demand for our products, however, the full extent of the future impact of the COVID-19 pandemic on the Company's operational and financial performance is currently uncertain and will depend on many factors outside of the Company's control.

Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting." The ASU, and subsequent clarifications, provide practical expedients for contract modification accounting related to the transition away from the London Interbank Offered Rate (LIBOR) and other interbank offering rates to alternative reference rates. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company intends to use the expedients where needed for reference rate transition. The Company continues to evaluate this standard update and does not currently expect a material impact to the Company’s financial statements or disclosures.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 2: Acquisitions

Acquisition of DanChem Technologies, Inc.

On October 22, 2021, the Company completed the acquisition of DanChem, a contract manufacturer of chemical products located in Danville, Virginia. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805 - "Business Combinations." The preliminary purchase price was $34.1 million including $1.5 million in cash obtained through the acquisition. The purchase price was paid in cash and funded through a drawdown of $34.5 million on the Company’s existing revolving credit facility. Amounts outstanding under the revolving line of credit portion of the facility currently bear interest, at the Company's option, at (a) the Base Rate (as defined in the Credit Agreement) plus 0.50%, or (b) LIBOR plus 150%. See Note 8 for more information on the Company's long-term debt.

The table below summarizes the preliminary estimates of fair value of identifiable assets acquired and liabilities assumed in the Acquisition. These preliminary estimates of the fair value are subject to revisions, which may result in an adjustment to the preliminary values presented below.


(in thousands)	October 22, 2021
Cash and cash equivalents	$	1,533
Accounts receivable, net of allowance for credit losses	5,358
Inventories, net	1,561
Prepaid expenses and other current assets	454
Property, plant and equipment, net	15,697
Right of use asset, operating leases, net	208
Intangible assets, net	5,750
Total identifiable assets acquired	30,561

Accounts payable	1,751
Accrued expenses and other current liabilities	1,622
Current portion of operating lease liabilities	51
Current portion of finance lease liabilities	215
Deferred income taxes	2,542
Long-term portion of operating lease liabilities	157
Long-term portion of finance lease liabilities	1,408
Total identifiable liabilities assumed	7,746

Net identifiable assets acquired	22,815
Transaction price	34,097

SEC Form 10-Q filed by Synalloy Corporation