synl-20210331

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, 2021


☐			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.)

4510 Cox Road,

Suite 201,

Richmond,

Virginia

23060

(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 7, 2021 was 9,202,045

Synalloy Corporation

Table of Contents



PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	4
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (unaudited)	5
	Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Note 1: Basis of Presentation	8
	Note 2: Revenue Recognition	8
	Note 3: Fair Value of Financial Instruments	9
	Note 4: Inventories	11
	Note 5: Property, Plant and Equipment	11
	Note 6: Intangible Assets and Deferred Charges	12
	Note 7: Long-term Debt	12
	Note 8: Leases	13
	Note 9: Shareholders' Equity	14
	Note 10: Exit Activities	15
	Note 11: Earn ings (Loss) Per Share	15
	Note 12: Income Taxes	15
	Note 13: Commitments and Contingencies	16
	Note 14: Industry Segments	16
	Note 15: Proxy Contest Costs and Recoveries	17
	Note 16: Subsequent Events	17
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27

	Signatures	28

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 from time-to-time in the Company's SEC filings. The Company assumes no obligation to update the information included in this Quarterly Report on Form 10-Q.

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, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	398	$	236
Accounts receivable, net of allowance for credit losses of $508 and $496, respectively	39,352		28,183
Inventories, net	88,763		85,080
Prepaid expenses and other current assets	9,440		13,384

Total current assets	137,953		126,883

Property, plant and equipment, net	33,477		35,096
Right-of-use assets, operating leases, net	31,429		31,769
Goodwill	1,355		1,355
Intangible assets, net	10,746		11,426

Deferred charges, net	367		455

Total assets	$	215,327	$	206,984

Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	26,089	$	19,732
Accrued expenses and other current liabilities	5,506		6,123
Current portion of long-term debt	1,313		875
Current portion of earn-out liability	2,773		3,434
Current portion of operating lease liabilities	897		867
Current portion of finance lease liabilities	14		19

Total current liabilities	36,592		31,050

Long-term debt	62,454		60,495
Long-term portion of earn-out liability	144		287
Long-term portion of operating lease liabilities	32,524		32,771
Long-term portion of finance lease liabilities	34		37
Deferred income taxes	1,916		1,957
Other long-term liabilities	87		92
Total non-current liabilities	97,159		95,639
Commitments and contingencies – See Note 13

Shareholders' equity
Common stock, par value $1 per share; authorized 24,000,000 shares; issued 10,300,000 shares	10,300		10,300
Capital in excess of par value	37,668		37,719
Retained earnings	43,929		42,835
	91,897		90,854
Less: cost of common stock in treasury - 1,097,956 and 1,123,319 shares, respectively	10,321		10,559
Total shareholders' equity	81,576		80,295
Total liabilities and shareholders' equity	$	215,327	$	206,984

Note: The condensed consolidated balance sheet at December 31, 2020 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,
	2021		2020
Net sales	$	69,778	$	74,697
Cost of sales	61,043		67,546
Gross profit	8,735		7,151
Expenses
Selling, general and administrative	6,869		7,770
Acquisition costs and other	—		304
Proxy contest costs and recoveries	(464)		—
Earn-out adjustments	225		4



Operating income (loss)	2,105		(927)
Other expense (income)
Interest expense	387		719
Loss on extinguishment of debt	223		—
Change in fair value of interest rate swaps	(2)		85
Other, net	162		827
Income (loss) before income taxes	1,335		(2,558)
Income tax provision (benefit)	241		(1,380)




Net income (loss)	$	1,094	$	(1,178)















Net income (loss) per common share:
Basic	$	0.12	$	(0.13)
Diluted	$	0.12	$	(0.13)

Weighted average shares outstanding:
Basic	9,191		9,074
Dilutive effect from stock options and grants	97		—
Diluted	9,288		9,074

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statement of Cash Flows (Unaudited)

(in thousands)


	Three Months Ended March 31,
	2021		2020
Operating activities
Net income (loss)	$	1,094	$	(1,178)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense	1,817		1,958
Amortization expense	680		810


Amortization of debt issuance costs	21		40
Loss on extinguishment of debt	223		—
Unrealized loss on equity securities	—		852
Deferred income taxes	(41)		1,319


Earn-out adjustments	225		4
Payments on earn-out liabilities in excess of acquisition date fair value	—		(292)
Provision for losses on accounts receivable	12		141
Provision for losses on inventories	184		358
Loss on disposal of property, plant and equipment	28		—
Non-cash lease expense	124		128
Non-cash lease termination loss	—		11

Change in fair value of interest rate swap	(2)		85

Stock-based compensation expense	187		336
Changes in operating assets and liabilities:
Accounts receivable	(11,181)		(7,737)
Inventories	(3,866)		676
Other assets and liabilities	38		2
Accounts payable	6,357		5,668
Accrued expenses	(569)		(1,085)
Accrued income taxes	3,901		(2,738)
Net cash used in operating activities	(768)		(642)
Investing activities
Purchases of property, plant and equipment	(245)		(587)
Proceeds from disposal of property, plant and equipment	18		—



Net cash used in investing activities	(227)		(587)
Financing activities
Borrowings from line of credit	14,730		3,201

Payments on long-term debt	(12,333)		(1,000)
Principal payments on finance lease obligations	(10)		(64)
Payments for finance lease terminations	—		(14)
Payments on earn-out liabilities	(1,029)		(863)
Payments for termination of interest rate swap	(46)		—
Repurchase of common stock	—		(635)
Payments for deferred financing costs	(155)		—
Net cash provided by financing activities	1,157		625
Increase (decrease) in cash and cash equivalents	162		(604)
Cash and cash equivalents at beginning of period	236		626
Cash and cash equivalents at end of period	$	398	$	22

Supplemental disclosure
Cash paid for:
Interest	$	315	$	667

See accompanying notes to condensed consolidated financial statements.

SYNALLOY CORPORATION

Condensed Consolidated Statement of Shareholders' Equity (Unaudited)

(in thousands)


	Three Months Ended March 31, 2021

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance December 31, 2020	$	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	$	37,668	$	43,929	$	(10,321)	$	81,576

See accompanying notes to condensed consolidated financial statements.


	Three Months Ended March 31, 2020

	Common Stock		Capital in Excess of Par Value		Retained Earnings		Cost of Common Stock in Treasury		Total
Balance December 31, 2019	$	10,300	$	37,407	$	70,552	$	(11,748)	$	106,511
Net loss	—		—		(1,178)		—		(1,178)
Cumulative adjustment due to adoption of ASU 2016-13	—		—		(450)		—		(450)
Issuance of 75,440 shares of common stock from treasury	—		(708)		—		708		—
Stock-based compensation	—		336		—		—		336
Purchase of common stock	—		—		—		(635)		(635)

Balance March 31, 2020	$	10,300	$	37,035	$	68,924	$	(11,675)	$	104,584

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, 2020 (the "Annual Report"). The financial results for the interim periods may not be indicative of the financial results for the entire year.

COVID-19 Update

During the first quarter of 2021, aspects of the Company's business continued to be affected by macroeconomic factors related to the COVID-19 pandemic, specifically with delays in production and deliveries at our plants. 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.

Recently Issued Accounting Standards - Adopted

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 condensed consolidated financial statements or footnote disclosures.

Recently Issued Accounting Standards - Not Yet Adopted

Recent accounting pronouncements pending adoption, other than those stated above, are not expected to have a material impact on the Company.

Note 2: Revenue Recognition

Revenues are recognized when control of the promised goods is transferred to our customers or when a service is rendered, in an amount that reflects the consideration we are to receive 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.


	Three Months Ended March 31,
(in thousands)		2021		2020
Fiberglass and steel liquid storage tanks and separation equipment		$	141	$	3,419
Heavy wall seamless carbon steel pipe and tube		7,818		7,314
Stainless steel pipe and tube		39,911		43,728
Galvanized pipe and tube		7,343		6,203
Specialty chemicals		14,565		14,033
Net sales		$	69,778	$	74,697

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for each performance obligation is based on its stand-alone selling price and revenue is recognized as each performance obligation is satisfied. The Company generally determines stand-alone selling prices based on the prices charged to customers using the adjusted market assessment approach or expected cost plus margin.

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 (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, a revolving line of credit, a term loan, and equity securities 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.

Synalloy Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Level 1: Equity securities

For the three months ended March 31, 2020, the Company recorded a net unrealized loss of $0.9 million on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying unaudited condensed consolidated statements of operations.

The Company held no equity securities as of March 31, 2021 and December 31, 2020, respectively.

Level 3: Contingent consideration (earn-out) liabilities

The fair value of contingent consideration ("earn-out") liabilities resulting from the 2017 MUSA-Stainless acquisition, 2018 MUSA-Galvanized acquisition, and 2019 American Stainless acquisition are classified as Level 3. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in operating income 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 significant unobservable inputs used in the fair value measurement of the Company's earn-out liabilities are the discount rate, timing of the estimated payouts, and future revenue projections. Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the three months ended March 31, 2021.

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 the three months ended March 31, 2021:


(in thousands)	MUSA-Stainless		MUSA-Galvanized		American Stainless		Total
Balance December 31, 2020	$	375	$	941	$	2,405	$	3,721
Earn-out payments during the period	(385)		(171)		(473)		(1,029)
Changes in fair value during the period	10		45		170		225
Balance March 31, 2021	$	—	$	815	$	2,102	$	2,917

For the three months ended March 31, 2021, 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 March 31, 2021:

Instrument

Fair Value
March 31, 2021

Principal Valuation Technique

Significant Unobservable Inputs

Range

Weighted
Average

Contingent consideration (earn-out) liabilities

$2,917

Probability Weighted Expected Return

Discount rate

Timing of estimated payouts

2021 - 2022

Future revenue projections

SEC Form 10-Q filed by Synalloy Corporation