UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017 |
ORFOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
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¨☐ | 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)
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| Delaware | | | 57-0426694 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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Delaware | | 57-0426694 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
| 4510 Cox Road, | Suite 201, Richmond, Virginia, 23060 | | | |
| Richmond, | Virginia | | | 23060 |
(Address of principal executive offices) (Zip | | | (Zip Code) |
| | (804) | 822-3260 | |
| | (Registrant's telephone number, including area code: (864) 585-3605code) | |
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(b)Title of the Acteach class | Trading Symbol | Name of each exchange on which registered:registered |
Common Stock, par value $1.00 Par Valueper share | SYNL | NASDAQ Global Market |
(Title of Class) | | |
Securities registered pursuant to Section 12(g) of the Act:None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No 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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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. (Check one)
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| Large accelerated filer | ¨☐ | Accelerated filer | x☐ |
| Non-accelerated filer | ¨ Do not check if smaller reporting company
☒ | 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. ¨
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, 2017,2020, 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 $92.9$38.9 million. Based on the closing price as of March 9, 2018, the aggregate market value of common stock held by non-affiliates of the registrant was $109.8 million. The registrant did not have any non-voting common equity outstanding at either date.
The number of shares outstanding of the registrant's common stock as of March 9, 20188, 2021 was 8,757,434.9,202,045.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 20172021 annual shareholders' meeting are incorporated by reference into Part III of this Form 10-K.
Synalloy Corporation
Form 10-K
For Period Ended December 31, 20172020
Table of Contents
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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;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; customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in nickel and oil prices; unforeseen delays in completing the integrations of acquisitions; risks associated with mergers, acquisitions, dispositions and other expansion activities; financial stability of our customers; environmental issues; negative or unexpected results from tax law changes; unavailability of debt financing on acceptable terms and exposure to increased market interest rate risk; inability to comply with covenants and ratios required by our debt financing arrangements; ability to weather an economic downturn; loss of consumer or investor confidence and other risks detailed in Item 1A, Risk Factors, in this Annual Report on Form 10-K and from time-to-time in Synalloy Corporation's Securities and Exchange Commission filings. Synalloy Corporation assumes no obligation to update any forward-looking information included in this Annual Report on Form 10-K.
PART I
Item 11. Business
Synalloy Corporation, a Delaware corporation, was incorporated in 1958 as the successor to a chemical manufacturing business founded in 1945. Its charter is perpetual. The name was changed on July 31, 1967 from Blackman Uhler Industries, Inc. The Company's executive office is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060 with an additional corporate and shared services office at 775 Spartan Boulevard, Suite 102, Spartanburg, South Carolina 29301.23060. 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"), a wholly-owned subsidiarywhich began operations effective January 1, 2019 pursuant to our acquisition of Synalloy Metals,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"). BRISMETWelded 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, andequipment. Specialty is a master distributor of seamless carbon pipe and tube. The Metals Segment'sSegment serves markets includethrough the oilmaster distribution of pipe and gas,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 waterwaste-water treatment, liquid natural gas ("LNG"), brewery, food processing, petroleum, 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"). The Specialty Chemicals Segment produces specialty chemicals for the chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional chemical companies and contracts with other chemical companies to manufacture certain, pre-defined products. The 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 – This The segment is comprised of threefour wholly-owned subsidiaries: Synalloy Metals, Inc., which owns 100 percent of the membership interests of BRISMET, located in Bristol, Tennessee and Munhall, Pennsylvania; ASTI, located in Troutman and Statesville, North Carolina; Palmer, located in Andrews, Texas; and Specialty, located in Mineral Ridge, Ohio and Houston, Texas. Two subsidiaries, BRISMET and ASTI, are aggregated as one reporting unit called Welded Pipe and Tube Operations, with Palmer and Specialty making up the segment's other two reporting units.
BRISMET manufactures welded pipe and tube, primarily from stainless steel, but also from other corrosion-resistant metals.duplex, and nickel alloys. Pipe is produced in sizes from one-half3/8 inch outside diameter to 120144 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 and wall thickness up to one and one-half inches. Eighteen-inch and smaller diameter pipe is made on equipment that forms and welds the pipe in a continuous process. Pipe larger than 18 inches in diameter is formed on presses or rolls and welded on batch welding equipment. Pipe is normally produced in standard 20-foot lengths. However, BRISMET also has unusual 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. Over the past four years, BRISMET has made substantial capital improvements, installing an energy efficient furnace to anneal pipe
quicker while minimizing natural gas usage; system improvements in pickling to maintain the proper chemical composition of the pickling acid; and developing a heavy wall/quick turn welded pipe production shop by adding a 4,000 tonne press along with all necessary ancillary processes. BRISMET's Munhall facility manufactures stainless welded pipe as well as new product offerings in welded tubingtube in diameters from 5/8 inch to 8five inches and gauges in diameters from 0.028 inchesinch to 0.120 inches. The1/4 inch. Additionally, the Munhall facility was designed for improved product flowproduces 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 latest technologyhighest 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 laser weldingsquares, rectangles and in-line annealing.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. The majorityMost 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. During 2014, Palmer obtained all of the necessary certifications to produce certified pressure vessels. These certifications allow Palmer to sell all of the separator and storage equipment needed at a well site.
Specialty is a leading master distributor of hot finish, seamless, carbon steel pipe and tubing,tube, with an emphasis on large outside diameters and exceptionally heavy wall thickness. Specialty's products are primarily used for mechanical and high pressurehigh-pressure applications in the oil and gas, capital goods manufacturing, heavy industrial, construction equipment, paper and chemical industries. Operating from facilities located in Mineral Ridge, Ohio and Houston, Texas, Specialty is well-positioned to serve the major industrial and energy regions and successfully reach other target markets across the United States. Specialty performs value-added processing on approximately 80 percent of products shipped, which would includeincludes cutting to length, heat treatment, testing, boring and end finishing and typically processes and ships orders in 24 hours or less. Based upon its short lead times, Specialty plays a critical role in the supply chain, supplying long lead-time items to markets that demand fast deliveries, custom lengths, and reliable execution of orders.
In order to establish stronger business relationships, theThe Metals Segment uses only a few raw material suppliers. Ninerelies on 10 suppliers that furnish approximately 8095 percent of total dollar purchases of raw materials withand one supplier furnishing 40that furnishes 33 percent of material purchases. However, theThe Company does not believe that the loss of this supplier would have a materially adverse effect on the Company as raw materials are readily available from a number of different sources, and the Company anticipates no difficulties in fulfilling its requirements.
Specialty Chemicals Segment – This 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. ThisThe segment also includes CRI Tolling which is located in Fountain Inn, South Carolina. MC and CRI Tolling are aggregated as one reporting unit and comprise the Specialty Chemicals Segment. Both facilities are fully licensed for chemical manufacture.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.
MC's strategy has been to focus on industries and markets that have goodstrong 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. ItMC 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 sixtwo laboratories for applied research and quality control which are staffed by eleven employees.11 employees, including multiple chemists.
MostThe majority of raw materials used by the segment are generally available from numerous independent suppliers and approximately 5248 percent of total purchases are from its top 1510 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.
Please see See Note 1514 to the Consolidated Financial Statements,consolidated financial statements, which are included in Item 8 of this Form 10-K, for financial information about the Company's segments.Sales and Distribution
Metals Segment – The Metals Segment utilizes separate sales organizations for its different product groups. StainlessWelded Pipe & Tube Operations include stainless steel and galvanized pipe isand tube, sold worldwide under the BRISMET trade name through authorized stocking distributors at warehouse locations throughoutand ornamental stainless tube, sold under the country.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 the distributors, OEM and end-userend use customers are BRISMET's President, two44 sales representatives comprised of inside sales employees, outside sales employees sevenand independent manufacturers' representatives and eight inside sales employees. Additionally, BRISMET operates international offices in Brussels, Belgium and Shanghai, China, with one person in each office.
Palmer employs three sales professionals that manage the relationship with customers and partnerships to identify and secure new sales. Additionally, the Metals Segment President assists in account relationship management with large customers.representatives. Customer feedback and in-field experience generate product enhancements and new product development.
Approximately 80 percent of Specialty's pipe and tube sales are to North American pipe and tube distributors with the remainder comprised of sales to end use customers. In addition to Specialty's President, Specialty utilizes two manufacturers' representatives and nine inside sales employees, whom are located at both locations, to obtain sales orders and service its customers.
The Metals Segment had one domestic customer that accounted for approximately 14 percent of the segment's revenues for 2015. There were no customers representing more than ten10 percent of the Metals Segment's revenues for 20172020 or 2016.2019, respectively.
Specialty Chemicals Segment – Specialty chemicals are sold directly to various industries nationwide by five full-time10 sales representatives comprised of outside sales employees and eightindependent manufacturers' representatives. The Specialty Chemicals Segment has one customer that accounted for approximately 23, 25 and 3116 percent of the segment's revenues for 2017, 20162020 and 2015,2019, respectively. The concentration of sales to this customer declined as a result of this customer moving production of the products previously produced and sold by the Specialty Chemicals Segment in house.
CompetitionDistribution
Metals Segment – Welded stainless steel pipe isPipe & Tube Operations produce the largest sales volume productgroup of products in the Metals Segment. AlthoughFor stainless steel and galvanized pipe and tube, although information is not publicly available regarding the sales of mostthe majority of other producers of this product,these products, management believes that the Company is one of the largest domestic producers of such pipe. This commoditypipe 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 is highly competitive with eight known domestic producers, includingavailable in the Company, and imports from many different countries.
Due to the size of the tanks produced and shipped to its customers, the majority of Palmer's products is sold within a 300 mile radius from its plant in Andrews, Texas. There are currently 18 tank producers, with similar capabilities, servicing that same area.market.
Specialty is a leader in the specialized products segment of the pipe and tube market by offering an industry-leadingindustry leading in-stock inventory of a broad range of high quality products, including specialized products with limited availability. Specialty's dual branches have both common and regional-specific products and capabilities. There are four known significant pipe and tube distributors with similar capabilities to Specialty.
Specialty Chemicals Segment – The Company is the sole producer of certain specialty chemicals manufactured for other companies under processing agreements and also produces proprietary specialty chemicals. The Company's sales of specialty 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 greatermore resources than does the Company.
Mergers, Acquisitions and Dispositions
The Company is committed to a long-term strategy of (a) reinvesting capital in our current business segments to foster their organic growth, (b) disposing of underperforming business segmentsunits, and (c) completing acquisitions that expand our current business segments and geographic footprint or establish new manufacturing platforms. Targeted acquisitions are priced to be economically feasible and focus on achieving positive long-term benefits. These acquisitions may be paid for in the form of cash, stock, debt or a combination thereof. 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.capabilities.
On December 9, 2016,January 1, 2019, ASTI completed the Company's subsidiary BRISMET, entered into a definitive agreementAmerican Stainless acquisition. The purpose of the transaction was to acquireextend and enhance the stainless steel pipe and tube assets of Marcegaglia USA, Inc. ("MUSA") located in Munhall, PA to enhance itsCompany's on-going business with additional capacity and new technological advantages. The transaction closed on February 28, 2017. The agreement was structured as an asset purchase and excluded MUSA's galvanized andadvantages in the production of stainless ornamental tubing products.tube. The purchase price was $21.9 million. American Stainless will also receive quarterly earn-out payments based on ASTI's revenue for the transaction, which excludes real estate and certain other assets, totaled $14,954,000; thea period of three years following closing. The tangible assets purchased and liabilities assumed from MUSA includeAmerican Stainless included accounts receivable, inventory, productionequipment, and
maintenance supplies and equipment less specific identified liabilities assumed. In accordance with the agreement, on December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. During the fourth quarter of 2017, the Company finalized the purchase price allocation for the acquisition. As part of the MUSA transaction, BRISMET assumed all of MUSA's rights and obligations pursuant to the Collective Bargaining Agreement between MUSA and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union AFL-CIO, on behalf of Local Union 5852-22 (the "Union") dated October 1, 2013 (the "CBA"). At the closing of the transaction, BRISMET and the Union amended the CBA to include a modest wage increase and to extend the CBA's termination date to September 30, 2018. A new CBA was ratified that extends the termination date to January 2023. 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 foresee the future well enoughquantify this risk due to quantify such risks. See Note 7 to the Consolidated Financial Statements, which are included in Item 8 of this Form 10-K, for further discussion.uncertainties.
Research and Development ActivitiesSeasonality
The Company spent approximately $556,000 in 2017, $603,000 in 2016 and $548,000 in 2015 on research and development activities that were expensed in its Specialty Chemicals Segment. Five individuals, all of whom are graduate chemists, are engaged primarily in research and development of new products and processes, the improvement of existing products and processes, and the development of new applications for existing products.
Seasonal Nature of the Business
With the exception of Palmer and Specialty's Houston location, which primarily serves the oil and gas industry, the Company’sCompany's businesses and products are generally not subject to any seasonal impactimpacts that resultsresult in significant variations in revenues from one quarter to another. Fourth quarter revenue and profit for Palmer and Specialty Houston can be as much as 25 percent below the other three quarters due to vacation schedules for customer field crews working at the drill sites.
Backlogs
The Metals Segment's Welded Pipe & Tube Operations and the Specialty Chemicals Segment operates primarily on the basis of delivering products soon after orders are received. Accordingly, backlogs are notincur a factor in this business. The same applies to seamless, carbon steel pipe and tubing sales in the Metals Segment. However, backlogs are important in the Metals Segment's welded stainless steel pipe and tank manufacturing operations, where both businesses incur significant dollar value of committed orders in advance of production. ItsThe backlog of open orders for welded stainless steel pipethe Welded Pipe & Tube Operations were $28,783,000$40.8 million and $18,752,000 and for tanks were $17,192,000 and $9,878,000$35.4 million at the end of 20172020 and 2016,2019, 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.
Employee RelationsHuman Capital
AtSafety 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.
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, 2017,2020, the Company had 533526 employees. The Company considers relations with employees to be strong. The number of employees of the Company represented by unions, located at the Bristol, Tennessee, Munhall, Pennsylvania, and Mineral Ridge, Ohio, and Bristol, Tennessee facilities, is 223,232, or 4244 percent of the Company's employees. They are represented by three locals affiliated with the United Steelworkers.Steelworkers (the "USW"). Collective bargaining contracts for the SteelworkersUSW locals expire at various dates between 2023 and 2024.
Our voluntary turnover rate in July 2019, June 2020 was approximately three percent. We monitor employee turnover rates by plant and January 2023, respectively.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.
Financial Information about Geographic AreasTotal Rewards
Information about revenues derived from domesticWe invest in our workforce by offering a competitive total rewards package that includes a combination of salaries and foreign customers is set forthwages, 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 Note 15 to the Consolidated Financial Statements.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, 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 1A1A. Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. Reference should be made to "Forward-Looking Statements" above, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 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
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 steel products.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 governmentallygovernment 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.
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. 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.
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 stronger business relationships,Purchasing the Metals Segment uses only a few raw material suppliers. During the year ended December 31, 2017, nine suppliers furnished approximately 80 percent of our total dollar purchases of raw materials, with
one supplier providing 40 percent. However, these raw materials are available from a number of sources, and the Company anticipates no difficulties in fulfilling its raw materials requirements for the Metals Segment. Raw materials used by the Specialty Chemicals Segment are generally available from numerous independent suppliers and approximately 52 percent of total purchases were made from our top 15 suppliers during the year ended December 31, 2017. Although some raw material needs are met by a single supplier or only a few suppliers, the Company anticipates no difficulties in fulfilling its raw material requirements for the Specialty Chemicals Segment. While the Company believes that raw materials for both segments are readily available from numerous sources, the loss of one or more key suppliers in either segment, or any other material change in our current supply channels, could have an adverse effect on the Company’s ability to meet the demand for its products, which could impact our operations, revenues and financial results.
A substantial portion of our overall sales is dependent upon a limited number of customers, and the loss of one or more of such customers would have a material adverse effect on our business, results of operation and profitability. The products of the Specialty Chemicals Segment are soldis also a major commitment on the part of our customers. Before a potential customer determines to various industries nationwide. The Specialty Chemicals Segment has one customer that accounted for approximately 23 percent, 25 percent and 31 percent of revenues for 2017, 2016 and 2015, respectively. The concentration of sales to this customer declined as a result of this customer moving production of thepurchase products previously produced and sold byfrom the Specialty Chemicals Segment, in house.the Company must produce test product material so that the potential customer is satisfied that we can manufacture a product to their specifications. The lossproduction of this customer would havesuch test materials is a material adverse effect ontime-consuming process. Accordingly, the revenues ofsales 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 Company.public market analysts and investors.
The Metals Segment had one customer that accounted for approximately 14 percent of revenues for 2015. There were no customers representing more than ten percent of the Metals Segment's revenues in 2017 or 2016. 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.
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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.
Oil pricesIn both of our business segments, our production facilities are extremely volatile. A substantial or extended declinesubject 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 pricefuture 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 oiloperations.
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, andor results of operations. Prices for oil can fluctuate widely. Our PalmerWe sell our products in industries that are affected by technological changes, new product introductions, and Specialty (Houston, Texas) units' revenues are highly dependent on our customers adding oil well drilling and pumping locations. Should oil prices decline such that drilling becomes unprofitable for our customers, such customers will likely cap many of their current wells and ceasechanging industry standards. If we do not respond by developing new products or curtail expansion. This will decrease the demand for our tanks and pipe and tube and adversely affect the results of our operations.
Significant changes in nickel prices could have an impact on the sales of the Metals Segment. The Metals Segment uses nickel in a number of its products. Nickel prices are currently at a relatively low level, which reduces our manufacturing costs for certain products. When nickel prices increase, many of our customers increase their orders in an attempt to avoid future price increases, resulting in increased sales for the Metals Segment. Conversely, when nickel prices decrease, many of our customers wait to place orders in an attempt to take advantage of subsequent price decreases, resulting in reduced sales for the Metals Segment. On average, the Metals Segment turns its inventory of commodity pipe every six months, but the nickel surcharge on sales of commodity pipe is establishedenhancing existing products 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 increasestimely basis, our products will become obsolete over time as it did from 2005and our revenues, cash flows, profitability and competitive position will suffer.
In addition, if we fail to 2007, the Metals Segment is the beneficiary of the increase in nickel priceaccurately predict future customer needs and preferences, we may invest heavily in the formdevelopment of metal price change gains. Conversely, if the price of nickel steadily decreases over time, as it did from 2011 to 2016, the Metals Segment suffers metal price change losses. 2017 was a highly volatile year, with nickel prices starting at a peak in January, and declining through the first nine months, with a steep trough during the third quarter (average down 25 percent from the first quarter), before rebounding to almost beginning of year levels by December. This volatile pattern didnew or enhanced products that do not result in average nickel prices being up 48 percent for the full year of 2017significant sales and up 38 percent for the fourth quarter 2017, when compared to the same periods of the prior year; however, substantial declines within the year generated cumulative inventory price change losses that exceeded inventory price change gains by $2,634,000 for the year. We will incur inventory price lossesrevenue. Even if we successfully innovate in the future if nickel prices decrease. Any material changes in the costdevelopment of nickel could impact our sales and result in fluctuations in the profits for the Metals Segment.
The Company began hedging its nickel exposure effective in the beginning of 2016 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. Each month, industry pricing indices are published which set the following month’s price surcharges for those alloys. The Company typically holds approximately six to seven months of inventory, with fixed priced purchase orders (where the alloy pricing index is “locked”, eliminating the Company’s exposure) consisting of approximately 50 percent of held stainless steel inventories. As a result, the eventual sales prices for approximately 50 percent of held stainless steel inventories will vary until a customer order commitment is received, and the selling price is established. In the past, the Company fully absorbed the potential negative market volatility that resulted from sales prices declining during the inventory hold period. In 2017 and 2016, the cumulative negative impact during the inventory hold period totaled $2,634,000 and $5,751,000, respectively, due to a substantial and prolonged period of nickel commodity pricing declines.
The Company’s nickel hedge program covers approximately three months of pricing exposure, via forward contracts, to sell nickel at fixed prices. Other alloys do not have hedge contracts available in the marketplace. The Company reviews the current nickel pricing level and if it believes there is significant downside exposure in future pricing, management will protect against these projected declines by purchasing contracts to “Put” nickel pounds to the trading party, with strike prices at 15 percent below the three-month forward price at the time of the contract. As a result, there is zero hedge coverage for the first 15 percent of nickel price decline, but dollar for dollar coverage for 100 percent of any decline below that level.
As of December 31, 2017 and December 31, 2016, the Company had a hedge position equal to 1,351,000 and 639,000, respectively, of pounds of nickel, representing 53 and 34 percent, respectively, of the Company’s total nickel content of stainless steel pounds in inventory. The Company does not utilize hedge accounting for these transactions but marks to market the value of the outstanding contracts with all adjustments being included in cost of sales in the Consolidated Statements of Operations. The fair value of the nickel contracts at December 31, 2017 and December 31, 2016 was an asset of approximately $9,000 and $87,000, respectively. The Company’s downside exposure is limited to the potential that the total of the fair value of the nickel contracts would be reduced to zero, if nickel pricing does not decline to the contracted strike prices. The program is designed to mitigate but not eliminate the Company's nickel pricing exposure.
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, we may incur substantial costs in doing so, and more efficient production capabilities,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.
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 could cause a decline in market acceptancemay have an adverse effect on our operations.
We use third parties over which we have only limited control to distribute certain of our products. CurrentBecause 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 future consolidation amongput us at a competitive disadvantage with our competitorscompetitors.
Freight costs for products produced in our Palmer facility restrict our sales area for this facility.
The freight 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 pricesother distribution costs for some ofproducts sold from our products as a result of intensified price competition. Competitive pressures can alsoPalmer facility result in the lossmarket 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 major customers. If we cannot compete successfully, our business, financial condition and profitability could be adversely affected.
Our lengthy sales cycle for the Specialty Chemicals Segment makes it difficult to predict quarterly revenue levels and operating results. Purchasing the products of the Specialty Chemicals Segment is a major commitment on the part of our customers. Before a potential customer determines to purchase products from the Palmer facility.
Loss of key supplier authorizations or lack of product availability could adversely affect our sales and earnings.
Our Specialty Chemicals Segment, the Company must produce testbusiness depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product material so that the potential customer is satisfied that we can manufacturesuppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations, or a product to their specifications. The production of such test materials is a time-consuming process. Accordingly, the sales process for productssubstantial decrease in the Specialty Chemicals Segment isavailability of their products, could put us at a lengthy process that requirescompetitive disadvantage and have a considerable investment of time and resourcesmaterial adverse effect on our part.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 timing offuture our revenues is difficultinsurance coverage may not cover claims to predict,the extent that it has in the past and the delaycosts that we incur to procure insurance may increase significantly, either of which could have an order could causeadverse effect on our quarterly revenues to fall below our expectations and thoseresults of the public market analysts and investors.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:
•the generation, use, storage, treatment, transportation, disposal and management of hazardous substances and wastes;
•emissions or discharges of pollutants or other substances into the environment;
•investigation and remediation of, and damages resulting from, releases of hazardous substances; and
•the health and safety of our employees.
Under certain environmental laws, we can be held strictly liable for hazardous substance contamination of any real property we have ever owned, operated or used as a disposal site. We are also required to maintain various environmental permits and licenses, many of which require periodic modification and renewal. Our operations entail the risk of violations of those laws and regulations, and we cannot assure you that we have been or will be at all times in compliance with all of these requirements. In addition, these requirements and their enforcement may become more stringent in the future.
We have incurred, and expect to continue to incur, additional capital expenditures in addition to ordinary costs to comply with applicable environmental laws, such as those governing air emissions and wastewater discharges.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.
We are dependent upon the continued operationFederal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of our production facilities, which are subject to a number of hazards. In both of our business segments, but especially in the Specialty Chemicals Segment, our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled downtime and environmental hazards whichsuch activities could result in liabilitydelays or eliminate new wells from being started, thus reducing the demand for workplace injuriesour fiberglass and fatalities.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, somewe could incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the
relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who could require that all of the components of our production capabilitiesproducts are highly specialized, which limits our ability to shift production to another facility in the event of an incident at a particular facility. If a production facility, or a critical portion of a production facility, were temporarily shut down, we likely would incur higher costs for alternate sources of supply for our products. We cannot assure you that we will not experience these types of incidents in the future or that these incidents will not result in production delays, failure to timely fulfill customer orders or otherwise have a material adverse effect on our business, financial condition or results of operations.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, 2017,2020, we had 223232 employees represented by unions at our Bristol, Tennessee, Munhall, Pennsylvania and Mineral Ridge, Ohio, and Munhall, Pennsylvania facilities, which is 4244 percent of the aggregate number of Company employees. These employees are represented by three local unions affiliated with the United Steelworkers (the “Steelworkers Union").USW. The collective bargaining contracts for the Steelworkers UnionsUSW will expire in July 2019, June 2020at various dates between 2023 and January 2023.2024. Although we believe that our present labor relations are satisfactory,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.
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 atas of December 31, 2017.2020. 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.
Our existing propertyOn 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 liability insurance coverages contain exclusionspublication of rates for certain tenors of USD LIBOR (1-month, 3-month, 6-month and limitations on coverage. We maintain various forms of insurance, including insurance covering claims related12-month) is currently under consultation by the ICE Benchmark Administration and may be extended until June 2023. It is not possible to our properties and risks associated with our operations. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and higher premiums, primarily frompredict the operationsfurther effect of the Specialty Chemicals Segment. As a result, our existing coverage may not be sufficient to coverrules of the FCA, any losses we may incur andchanges in the future our insurance coveragemethods by which LIBOR is determined, or any other reforms to LIBOR that may not cover claimsbe enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to the extent that it hasperform differently than in the past and the costs that we incuror cease to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations or cash flows.
We may not be able to make the operational and product changes necessary to continue to be an effective competitor. We must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be an effective competitor in our business markets.exist. In addition, we must anticipateany 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 respond to changes in industry standards that affect our productsthe rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, 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 productscertain situations, could result in LIBOR no longer being determined and published. If a decreasepublished 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 revenues from existing products. Also, we may needinterest obligations which are 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 obsoleteotherwise 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 our revenues, cash flows, profitability and competitive position will suffer.
In addition, if we failrisks that may lead to accurately predict future customer needs and preferences, wethe discontinuation or unavailability of U.S. dollar LIBOR may invest heavily inmake one or more of the developmentalternative methods impossible or impracticable to determine. Any of newthese proposals 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,consequences could have a material adverse effect on our business and our results of operations.financing costs.
Our strategy of using acquisitions and dispositions to position our businesses may not always be successful, which may have a material adverse impact on our financial results and profitability.
We have historically utilized acquisitions and dispositions in an effort to strategically position our businesses and improve our ability to compete. We plan to continue to do this by seeking specialty niches, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of our existing business units. We consider acquisitions, joint ventures and other business combination opportunities as well as possible business unit dispositions. From time-to-time, management holds discussions with management of other companies to explore such opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; significant transaction costs that were not identified during due diligence; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; impairments of goodwill; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. The amount and type of consideration and deal charges paid could have a short-term dilutive effect on the Company's earnings per share. However, such transactions are anticipated to provide long-term economic benefit to the Company. If acquisition opportunities are not available or if one or more acquisitions are not successfully integrated into our operations, this could have a material adverse impact on our financial results and profitability.
The loss of key membersImpairment in the carrying value of our management team,fixed assets, intangible assets, or difficulty attractinggoodwill could adversely affect our financial condition and retaining experienced technical personnel,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 reduceindicate 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 competitivenessexpected 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 businessfinancial condition and consolidated results of operations.The successful implementation of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management team. The loss of key members of our management team could have an adverse effect on our business. Although we have entered into employment agreements with key members of our management team including Craig C. Bram, President and Chief Executive Officer, Dennis M. Loughran, Senior Vice President and Chief Financial Officer, Sally M. Cunningham, Vice President of Corporate Administration, J. Kyle Pennington, President of Metals Segment, James G. Gibson, General Manager and President of Specialty Chemicals Segment, Steven J. Baroff, President and General Manager of Specialty, K. Dianne Beck, Vice President of Specialty, Christopher D. Sitka, Vice President of Specialty and Kevin Van Zandt, Vice President of Bristol Metals-Munhall, employees may resign from the Company at any time and seek employment elsewhere, subject to certain non-competition restrictions. Additionally, if we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.
Intellectual Property Risks
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities could result in delays or eliminate new wells from being started, thus reducing the demand for our fiberglass and steel storage tanks, pressure vessels and heavy walled pipe and tube. Hydraulic fracturing (“fracking”) is currently an essential and common practice to extract oil from dense subsurface rock formations and this lower cost extraction method is a significant driving force behind the surge of oil exploration and drilling in several locations in the United States. However, the Environmental Protection Agency, U.S. Congress and state legislatures have considered adopting legislation to provide additional regulations and disclosures surrounding this process. In the event that new legal restrictions surrounding the fracking process are adopted in the areas in which our customers operate, we may see a dramatic decrease in Palmer's and Specialty - Texas' profitability which could have an adverse impact on our financial results.
Our allowance for doubtful accounts may not be adequate to cover actual losses. An allowance for doubtful accounts in maintained for estimated losses resulting from the inability of our customers to make required payments. This allowance may not be adequate to cover actual losses, and future provisions for losses could materially and adversely affect our operating results. The allowance for doubtful accounts is based on an evaluation of the outstanding receivables and existing economic conditions. The amount of future losses is susceptible to changes in economic, operating and other outside forces and conditions, all of which are beyond our control, and these losses may exceed current estimates. Although management believes that the allowance for doubtful accounts is adequate to cover current estimated losses, management cannot make assurances that we will not further increase the allowance for doubtful accounts. A significant increase in the allowance for doubtful accounts could adversely affect our earnings.
We depend on third parties to distribute certain of our products and because we have no control over such third parties we are subject to adverse changes in such parties’ operations or interruptions of service, each of which may have an adverse effect on our operations. We use third parties over which we have only limited control to distribute certain of our products. Our dependency on these third party distributors has increased as our business has grown. Because we rely on these third parties to provide distribution services, any change in our ability to access these third party distribution services could have an adverse impact on our revenues and put us at a competitive disadvantage with our competitors.
Freight costs for products produced in our Palmer facility restrict our sales area for this facility. The freight and other distribution costs for products sold from our Palmer facility are extremely high. As a result, the market area for these products is restricted, which limits the geographic market for Palmer’s tanks and the ability to significantly increase revenues derived from sales of products from the Palmer facility.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These regulations require companies to conduct annual due diligence and disclose whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. Tungsten and tantalum are designated as conflict minerals under the Dodd-Frank Act. These metals are used to varying degrees in our welding materials and are also present in specialty alloy products. These new requirements could adversely affect the sourcing, availability and pricing of minerals used in our products. In addition, we could incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who could require that all of the components of our products are conflict mineral-free.
Our inability to sufficiently or completely protect our intellectual property rights could adversely affect our business, prospects, financial condition and results of operations.
Our ability to compete effectively in both of our business segments will depend on our ability to maintain the proprietary nature of the intellectual property used in our businesses. These intellectual property rights consist largely of trade-secrets and know-how. We rely on a combination of trade secrets and non-disclosure and other contractual agreements and technical measures to protect our rights in our intellectual property. We also depend upon confidentiality agreements with our officers, directors, employees, consultants and subcontractors, as well as collaborative partners, to maintain the proprietary nature of our intellectual property. These measures may not afford us sufficient or complete protection, and others may independently develop intellectual property similar to ours, otherwise avoid our confidentiality agreements or produce technology that would adversely affect our business, prospects, financial condition and results of operations.
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
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. Because
We are subject to Section 404 of its inherent limitations,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 controlscontrol 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 prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Any failure to maintain effective internal controls or to timely effect any necessary improvementnot. Undetected material weaknesses in our internal controlscontrol over financial reporting could lead to financial statement restatements and disclosure controlsrequire 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 among other things, result in losses from fraud or error, harm our reputation oroperating results, cause investors to lose confidence in our reported financial information alland cause the trading price of which could haveour stock to fall. In addition, as a material adverse effect onpublic 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 condition, results on an accurate and timely basis could result in sanctions, lawsuits, delisting of operationsour 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 cash flows.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.
Loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs could adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations, or a substantial decrease in the availability of their products, could put us at a competitive disadvantage and have a material adverse effect on our business. Supply interruptions could arise from raw material shortages, inadequate manufacturing capacity or utilization to meet demand, financial problems, labor disputes or weather conditions affecting suppliers' production, transportation disruptions or other reasons beyond our control.
In addition, as a master distributor, we face the risk of key product suppliers changing their relationships with distributors generally, or Specialty in particular, in a manner that adversely impacts us. For example, key suppliers could change the following: the prices we must pay for their products relative to other distributors or relative to competing products; the geographic or product line breadth of distributor authorizations; supplier purchasing incentive or other support programs; or product purchase or stock expectations.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining customer demand. Certain of our product and raw material suppliers have historically offered to their customers and distributors, including us, incentives for purchasing their products. In addition to market or customer account-specific incentives, certain suppliers pay incentives to the customer or distributor for attaining specific purchase volumes during the program period. In some cases, in order to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When the demand for our products declines, we may be less willing to add inventory to take advantage of certain incentive programs, thereby potentially adversely impacting our profitability.
The ongoing effects of the Tax Cuts and Jobs Act ("The Act") and the refinement of provisional estimates could make our results difficult to predict. Our effective tax rate may fluctuate in the future as a result of The Act, which was enacted on December 22, 2017. The Act introduced significant changes to U.S. income tax law that will have a meaningful impact on our provision for income taxes. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the The Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the The Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. The U.S. Treasury Department, the Internal Revenue Service ("IRS"), and other standard-setting bodies may issue guidance on how the provisions of the The Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, and interpret the The Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our effective tax rate in the period in which the adjustments are made.
Item 1B1B. Unresolved Staff Comments
None.
Item 22. 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 1211 to the Consolidated Financial Statementsconsolidated financial statements included in Item 8 of this Form 10-K. On February 28, 2017,January 1, 2019, ASTI completed the Company purchased certain stainless steel pipe and tube assets of MUSA in Munhall, PA. As part of thisAmerican Stainless acquisition. In connection with the acquisition, the Company and Store Funding entered into a 15-monthsecond Amended and Restated Master Lease, pursuant to which the Company will lease with the sellersproperties purchased by Store Funding from American Stainless on January 1, 2019, for the current manufacturing facility. The lease was amended to extendremainder of the initial term of 20 years set forth in the lease to May 31, 2023. 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 | | Principal Operations | | Building Square Feet | | Land Acres |
| Munhall, PA | | Manufacturing stainless steel pipe | | 284,000 | | 20.0 |
| Bristol, TN | | Manufacturing stainless steel pipe | | 275,000 | | 73.1 |
| Cleveland, TN | | Chemical manufacturing and warehousing facilities | | 143,000 | | 18.8 |
| Fountain Inn, SC | | Chemical manufacturing and warehousing facilities | | 136,834 | | 16.9 |
| Andrews, TX | | Manufacturing liquid storage solutions and separation equipment | | 122,662 | | 19.6 |
| Troutman, NC | | Manufacturing ornamental stainless steel tube | | 106,657 | | 26.5 |
| Statesville, NC | | Manufacturing ornamental stainless steel tube | | 83,000 | | 26.8 |
| Houston, TX | | Cutting facility and storage yard for heavy walled pipe | | 29,821 | | 10.0 |
| Mineral Ridge, OH | | Cutting facility and storage yard for heavy walled pipe | | 12,000 | | 12.0 |
| Mineral Ridge, OH | | Storage yard for heavy walled pipe | | — | | 4.6 |
| Richmond, VA | | Corporate headquarters | | 5,911 | | — |
| Spartanburg, SC | | Former office space for corporate employees and shared service center (1) | | 4,858 | | — |
(1)Property leased by Company; office was closed in 2018 and all furniture and equipment have been removed.
|
| | | | | | |
| Location | | Principal Operations | | Building Square Feet | | Land Acres |
| Munhall, PA | | Manufacturing stainless steel pipe | | 284,000 | | 20.0 |
| Bristol, TN | | Manufacturing stainless steel pipe | | 275,000 | | 73.1 |
| Cleveland, TN | | Chemical manufacturing and warehousing facilities | | 143,000 | | 18.8 |
| Fountain Inn, SC | | Chemical manufacturing and warehousing facilities | | 136,834 | | 16.9 |
| Andrews, TX | | Manufacturing liquid storage solutions and separation equipment | | 122,662 | | 19.6 |
| Houston, TX | | Cutting facility and storage yard for heavy walled pipe | | 29,821 | | 10.0 |
| Mineral Ridge, OH | | Cutting facility and storage yard for heavy walled pipe | | 12,000 | | 12.0 |
| Mineral Ridge, OH | | Storage yard for heavy walled pipe | | — | | 4.6 |
| Richmond, VA | | Corporate headquarters | | 5,911 | | — |
| Spartanburg, SC | | Office space for corporate employees and shared service center | | 4,858 | | — |
| Augusta, GA | | Chemical manufacturing (1) | | — | | 46.0 |
| |
(1) | Property owned by Company; plant was closed in 2001 and all structures and manufacturing equipment have been removed. |
Item 33. Legal Proceedings
For a discussion of legal proceedings, see Notes 7 and 13Note 12 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 44. Mine Safety Disclosures
Not applicable.
PART II
Item 55. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company had 468393 common shareholders of record at March 9, 2018.8, 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. The Company paid a $0.13 cash dividend on November 6, 2017 and a $0.30 cash dividend on December 8, 2015. No dividends were declared or paid in 2016.2020 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 |
| Quarter | | High | | Low | | High | | Low |
| 1st | | $ | 14.25 | | | $ | 8.33 | | | $ | 16.80 | | | $ | 12.45 | |
| 2nd | | 10.60 | | | 6.51 | | | 19.65 | | | 14.00 | |
| 3rd | | 8.48 | | | 5.52 | | | 17.17 | | | 15.28 | |
| 4th | | 8.14 | | | 3.81 | | | 16.02 | | | 11.45 | |
|
| | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| Quarter | | High | | Low | | High | | Low |
| 1st | | $ | 13.35 |
| | $ | 9.75 |
| | $ | 10.07 |
| | $ | 6.42 |
|
| 2nd | | 13.75 |
| | 10.40 |
| | 8.50 |
| | 7.25 |
|
| 3rd | | 13.10 |
| | 10.30 |
| | 9.68 |
| | 6.56 |
|
| 4th | | 15.30 |
| | 11.88 |
| | 11.70 |
| | 8.57 |
|
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 12/31/1215 in stock or index, including reinvestment of dividends. |
| Fiscal year ending December 31. |
|
| Source: Russell Investment Group |
Comparison of 5 Year Cumulative Total Return Graph
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/15 | | 12/16 | | 12/17 | | 12/18 | | 12/19 | | 12/20 |
| Synalloy Corporation | | $ | 100.00 | | | $ | 159.16 | | | $ | 196.49 | | | $ | 247.02 | | | $ | 192.23 | | | $ | 116.14 | |
| Russell 2000 | | 100.00 | | | 121.31 | | | 139.08 | | | 123.76 | | | 155.35 | | | 186.36 | |
| NASDAQ Non-Financial | | 100.00 | | | 107.53 | | | 141.01 | | | 137.21 | | | 187.89 | | | 276.01 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 |
| Synalloy Corporation | | $ | 100.00 |
| | $ | 109.05 |
| | $ | 127.38 |
| | $ | 51.74 |
| | $ | 82.35 |
| | $ | 101.67 |
|
| Russell 2000 | | 100.00 |
| | 138.82 |
| | 145.62 |
| | 139.19 |
| | 168.85 |
| | 193.58 |
|
| NASDAQ Non-Financial | | 100.00 |
| | 141.29 |
| | 164.62 |
| | 176.19 |
| | 189.29 |
| | 247.35 |
|
This graph and related information shall not be deemed to be “filed” with the Securities and Exchange Commission or “soliciting material” or subject to Regulation 14A, or the liabilities of Section 18 of the 1934 Act, except to the extent the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933 or the 1934 Act.
Unregistered Sales of Equity Securities
Pursuant to the compensation arrangement with directors discussed under Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in this Form 10-K, on May 17, 2017,in 2020, the Company issued an aggregate of 24,20943,063 shares of restricted stock to non-employee directors in lieu of $287,500$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(2)4(a)(2) thereof because no public offering was involved. The Company also issued 34,322151,019 shares of common stock in 20172020 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(2)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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | | Number of Shares that may Yet Be Purchased under the Program(1) |
| January 1, 2020 - January 31, 2020 | — | | | $ | — | | | — | | | 850,000 | |
| February 1, 2020 - February 29, 2020 | — | | | $ | — | | | — | | | 850,000 | |
| March 1, 2020 - March 31, 2020 | 59,617 | | | $ | 10.65 | | | 59,617 | | | 790,383 | |
| Total | 59,617 | | | $ | 10.65 | | | 59,617 | | | 790,383 | |
(1) Pursuant to the 850,000 share stock repurchase program authorized by the Issuer and Affiliated Purchasers
|
| | | | | | | | | | | | | |
Period | | (a)
Total number of shares (or units) purchased
| | (b)
Average price paid per share (or unit)
| | (c)
Total number of shares (or units) purchased as part of publicly announced plans or programs
| | (d)
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
|
January 1, 2017 - January 31, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
February 1, 2017 - February 29, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
March 1, 2017 - March 31, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
April 1, 2017 - April 30, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
May 1, 2017 - May 31, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
June 1, 2017 - June 30, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
July 1, 2017 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
August 1, 2017 - August 31, 2017 | | — |
| | $ | — |
| | — |
| | 870,100 |
|
Total | | — |
| | | | — |
| | |
The Stock Repurchase Plan was approved by the Company's Board of Directors on August 31, 2015 authorizing the Company's chief executive officer or the chief financial officer toin February 2019. The stock repurchase shares of the Company's stock on the open market, provided however, that the number of shares of common stock repurchased pursuant to the resolutions adopted by the Board do not exceed 1,000,000 sharesprogram expires in 24 months from authorization, and no shares shall be repurchased at a price in excess of $10.99 per share or during an insider trading "closed window" period. There wasthere is no guarantee onto the exact number of shares that will be purchasedrepurchased by the Company andover that period. For additional information, see Note 16 in the Company could discontinue purchases at any time that management determines additional purchases are not warranted. The Stock Repurchase Plan expired on August 31, 2017.
notes to the consolidated financial statements included in Item 8 of this Form.
Item 66. Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | |
| Selected Financial Data and Other Financial Information |
| (Dollar amounts in thousands except for per share data) |
| | 2017 | | 2016 | | 2015(c) | | 2014 (a) | | 2013 |
Operations (b) | | | | | | | | | |
| Net sales | $ | 201,148 |
| | $ | 138,566 |
| | $ | 175,460 |
| | $ | 199,505 |
| | $ | 196,751 |
|
| Gross profit | 28,081 |
| | 16,904 |
| | 25,319 |
| | 32,929 |
| | 19,798 |
|
Selling, general & administrative expense(e) | 24,875 |
| | 22,673 |
| | 21,938 |
| | 16,530 |
| | 15,987 |
|
| Goodwill impairment | — |
| | — |
| | 17,158 |
| | — |
| | — |
|
Operating income (loss)(e) | 2,746 |
| | (8,246 | ) | | (13,031 | ) | | 16,098 |
| | 3,547 |
|
| Net income (loss) - continuing operations | 1,341 |
| | (6,994 | ) | | (10,269 | ) | | 12,619 |
| | 2,898 |
|
| Net loss - discontinued operations | — |
| | (99 | ) | | (1,251 | ) | | (7,157 | ) | | (1,137 | ) |
| Net income (loss) | 1,341 |
| | (7,093 | ) | | (11,520 | ) | | 5,462 |
| | 1,761 |
|
| Financial Position | | | | | | | | | |
Total assets(d), (e) | 159,874 |
| | 138,638 |
| | 149,043 |
| | 187,633 |
| | 163,068 |
|
Working capital(d), (f) | 74,396 |
| | 64,868 |
| | 58,310 |
| | 64,580 |
| | 74,992 |
|
Long-term debt, less current portion(e) | 25,914 |
| | 8,804 |
| | 23,410 |
| | 27,039 |
| | 20,713 |
|
| Shareholders' equity | 89,700 |
| | 88,593 |
| | 95,154 |
| | 109,454 |
| | 106,098 |
|
| Financial Ratios | | | | | | | | | |
Current ratio(d), (e), (f) | 3.2:1 |
| | 3.0:1 |
| | 3.2:1 |
| | 2.6:1 |
| | 4.0:1 |
|
Gross profit to net sales(b) | 14 | % | | 12 | % | | 14 | % | | 17 | % | | 10 | % |
Long-term debt to capital(e) | 22 | % | | 9 | % | | 20 | % | | 20 | % | | 16 | % |
Return on average assets(b), (d), (e) | 1 | % | | (4 | )% | | (6 | )% | | 7 | % | | 2 | % |
Return on average equity(b) | 2 | % | | (7 | )% | | (10 | )% | | 12 | % | | 3 | % |
Per Share Data (Income/(Loss) – Diluted) | | | | | | | | | |
| Net income (loss) - continuing operations | $ | 0.15 |
| | $ | (0.81 | ) | | $ | (1.18 | ) | | $ | 1.45 |
| | $ | 0.42 |
|
| Net loss - discontinued operations | — |
| | (0.01 | ) | | (0.14 | ) | | (0.82 | ) | | (0.16 | ) |
| Net income (loss) | 0.15 |
| | (0.82 | ) | | (1.32 | ) | | 0.63 |
| | 0.25 |
|
| Dividends declared and paid | 0.13 |
| | — |
| | 0.30 |
| | 0.30 |
| | 0.26 |
|
| Book value | 10.27 |
| | 10.22 |
| | 11.02 |
| | 12.57 |
| | 12.21 |
|
| Other Data | | | | | | | | | |
Depreciation and amortization(b), (e) | $ | 7,738 |
| | $ | 6,695 |
| | $ | 6,634 |
| | $ | 5,132 |
| | $ | 4,625 |
|
Capital expenditures(b) | 5,279 |
| | 3,044 |
| | 10,905 |
| | 8,066 |
| | 5,648 |
|
| Employees at year end | 533 |
| | 412 |
| | 411 |
| | 464 |
| | 670 |
|
| Shareholders of record at year end | 488 |
| | 527 |
| | 540 |
| | 575 |
| | 619 |
|
| Average shares outstanding - diluted | 8,727 |
| | 8,650 |
| | 8,710 |
| | 8,715 |
| | 6,947 |
|
| Stock Price | | | | | | | | | |
| Price range of common stock | | | | | | | | | |
| High | $ | 15.30 |
| | $ | 11.70 |
| | $ | 18.49 |
| | $ | 18.84 |
| | $ | 17.38 |
|
| Low | 9.75 |
| | 6.42 |
| | 6.20 |
| | 13.14 |
| | 12.53 |
|
| Close | 13.40 |
| | 10.95 |
| | 6.88 |
| | 17.67 |
| | 15.53 |
|
(a) 2014 representsWe are a 53 week year.
(b) Informationsmaller reporting company as defined in the section or line has been re-stated to reflect continuing operations only.
(c) Effective December 31, 2015, the Company changed from a fiscal year to a calendar year.
(d) Effective 2015, the section or line includes the effectsRule 12b-2 of the adoptionExchange Act; therefore, pursuant to Item 301(c) of ASU 2015-17, Balance Sheet Classification and Deferred Taxes, requiring all deferred tax assets and liabilities and any related valuation allowanceRegulation S-K, we are not required to be classified as non-current on our consolidated balance sheets. Prior periods were not retrospectively adjusted.provide the information required by this Item.
(e) Information in the line has been re-stated to reflect the adoption of ASU 2015-03, Interest - Imputation of Interest, requiring debt issuance cots related to a recognized debt liability be presented as a direct deduction of the debt liability.
(f) Information in the line has been re-stated to reflect the reclassification of deferred lease liabilities from accrued expenses to other long-term liabilities.
Item 77. Management's Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting PoliciesThis discussion and Estimates
Management's Discussionanalysis summarizes the significant factors affecting our consolidated operating results, liquidity, and Analysis of Financial Conditioncapital resources during the two-year period ended December 31, 2020. Unless otherwise noted, all references herein for the years 2020 and Results of Operations discusses2019 represent the Company'sfiscal 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 whichand 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
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.
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
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. | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| (in thousands) | Amount | | % | | Amount | | % |
| Net sales | $ | 204,459 | | | 100.0 | % | | $ | 251,078 | | | 100.0 | % |
| Cost of goods sold | 189,103 | | | 92.5 | % | | 226,852 | | | 90.4 | % |
| Gross profit | 15,356 | | | 7.5 | % | | 24,226 | | | 9.6 | % |
| Selling, general and administrative expense | 17,538 | | | 8.6 | % | | 20,534 | | | 8.2 | % |
| Asset impairments | 6,214 | | | 3.0 | % | | — | | | — | % |
| Goodwill impairment | 16,203 | | | 7.9 | % | | — | | | — | % |
| Operating (loss) income | $ | (24,599) | | | (12.0) | % | | $ | 3,692 | | | 1.5 | % |
| | | | | | | |
Comparison of 2020 to 2019 - Metals Segment
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;
•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. | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| (in thousands) | Amount | | % | | Amount | | % |
| Net sales | $ | 51,541 | | | 100.0 | % | | $ | 54,090 | | | 100.0 | % |
| Cost of goods sold | 43,736 | | | 84.9 | % | | 46,983 | | | 86.9 | % |
| Gross profit | 7,805 | | | 15.1 | % | | 7,107 | | | 13.1 | % |
| Selling, general and administrative expense | 3,772 | | | 7.3 | % | | 4,296 | | | 7.9 | % |
| | | | | | | |
| Operating income | $ | 4,033 | | | 7.8 | % | | $ | 2,811 | | | 5.2 | % |
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).
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.
Consolidated EBITDA and Adjusted EBITDA are as follows:
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| ($ in thousands) | 2020 | | 2019 |
| Consolidated | | | |
| Net loss | $ | (27,267) | | | $ | (3,036) | |
| Adjustments: | | | |
| Interest expense | 2,110 | | | 3,818 | |
| Change in fair value of interest rate swap | 51 | | | 141 | |
| Income taxes | (4,706) | | | (727) | |
| Depreciation | 7,572 | | | 7,578 | |
| Amortization | 3,028 | | | 3,486 | |
| EBITDA | (19,212) | | | 11,260 | |
| Acquisition costs and other | 861 | | | 1,936 | |
| Proxy contest costs | 3,105 | | | — | |
| Shelf registration costs | — | | | 10 | |
| Earn-out adjustments | (1,195) | | | (747) | |
| Gain on investments in equity securities | (170) | | | (1,873) | |
| Asset impairments | 6,214 | | | — | |
| Goodwill impairment | 16,203 | | | — | |
| Gain on lease modification | (171) | | | — | |
| Stock-based compensation | 1,791 | | | 2,091 | |
| Non-cash lease expense | 510 | | | 560 | |
| Retention expense | 235 | | | 223 | |
| Restructuring and severance costs | 1,076 | | | — | |
| Adjusted EBITDA | $ | 9,247 | | | $ | 13,460 | |
| % sales | 3.6 | % | | 4.4 | % |
Metals Segment EBITDA and Adjusted EBITDA are as follows:
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| ($ in thousands) | 2020 | | 2019 |
| Metals Segment | | | |
| Net (loss) income | $ | (22,388) | | | $ | 4,356 | |
| Adjustments: | | | |
| Interest expense | 11 | | | 83 | |
| Depreciation | 5,855 | | | 5,954 | |
| Amortization | 3,028 | | | 3,486 | |
| EBITDA | (13,494) | | | 13,879 | |
| Acquisition costs and other | 16 | | | 1,381 | |
| Earn-out adjustments | (1,195) | | | (747) | |
| Asset impairments | 6,214 | | | — | |
| Goodwill impairment | 16,203 | | | — | |
| Stock-based compensation | 303 | | | 663 | |
| Retention expense | — | | | 123 | |
| Metals Segment Adjusted EBITDA | $ | 8,047 | | | $ | 15,299 | |
| % of segment sales | 3.9 | % | | 6.1 | % |
Specialty Chemicals Segment EBITDA and Adjusted EBITDA are as follows:
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| ($ in thousands) | 2020 | | 2019 |
| Specialty Chemicals Segment | | | |
| Net income | $ | 4,046 | | | $ | 2,811 | |
| Adjustments: | | | |
| Interest expense | 9 | | | — | |
| Depreciation | 1,552 | | | 1,461 | |
| EBITDA | 5,607 | | | 4,272 | |
| Stock-based compensation | 207 | | | 226 | |
| Specialty Chemicals Segment Adjusted EBITDA | $ | 5,814 | | | $ | 4,498 | |
| % of segment sales | 11.3 | % | | 8.3 | % |
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:
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Amounts in thousands, except per share data) | 2020 | | 2019 |
| Loss before income taxes | $ | (31,973) | | | $ | (3,763) | |
| | | | |
| Adjustments: | | | |
| Acquisition costs and other | 861 | | | 1,936 | |
| Proxy contest costs | 3,105 | | | — | |
| Shelf registration costs | — | | | 10 | |
| Earn-out adjustments | (1,195) | | | (747) | |
| Gain on investments in equity securities | (170) | | | (1,873) | |
| Asset impairments | 6,214 | | | — | |
| Goodwill impairment | 16,203 | | | — | |
| Gain on lease modification | (171) | | | — | |
| Stock-based compensation | 1,791 | | | 2,091 | |
| Non-cash lease expense | 510 | | | 560 | |
| Retention expense | 235 | | | 223 | |
| Restructuring and severance costs | 1,076 | | | — | |
| Adjusted loss before income taxes | (3,514) | | | (1,563) | |
| Benefit for income taxes at 21% | (738) | | | (328) | |
| | | | |
| Adjusted net loss | $ | (2,776) | | | $ | (1,235) | |
| | | | |
| Average shares outstanding, as reported | | | |
| Basic | 9,099 | | | 8,983 | |
| Diluted | 9,099 | | | 8,983 | |
| | | | |
| Adjusted net loss per common share | | | |
| Basic | $ | (0.31) | | | $ | (0.14) | |
| Diluted | $ | (0.31) | | | $ | (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:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| (in thousands) | | | | | 2020 | | 2019 | | | | |
| Total cash provided by (used in): | | | | | | | | | | | |
| Operating activities | | | | | 17,978 | | | 28,640 | | | | | |
| Investing activities | | | | | 994 | | | (25,695) | | | | | |
| Financing activities | | | | | (19,362) | | | (4,539) | | | | | |
| Net decrease in cash and cash equivalents | | | | | $ | (390) | | | $ | (1,594) | | | | | |
Operating Activities
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.
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:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| | | | | 2020 | | 2019 | | | | |
| Number of shares repurchased | | | | | 59,617 | | | — | | | | | |
| Average price per share | | | | | $ | 10.65 | | | — | | | | | |
| Total cost of shares repurchased | | | | | $ | 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:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | |
| | | | | 2020 | | 2019 | | | | |
| Current ratio | | | | | 4.1 | | 3.6 | | | | |
| Debt to capital | | | | | 43% | | 41% | | | | |
| Return on average equity | | | | | (29.2)% | | (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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payment Obligations for the Year Ended |
| (in thousands) | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| Obligations: | | | | | | | | | | | | | |
Revolving credit facility(1) | $ | 49,037 | | | $ | 49,037 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Term loans(1) | 12,333 | | | 4,000 | | | 4,000 | | | 4,000 | | | 333 | | | — | | | — | |
| Interest on bank debt | 1,284 | | | 1,102 | | | 131 | | | 48 | | | 3 | | | — | | | — | |
| Finance lease | 58 | | | 20 | | | 15 | | | 15 | | | 8 | | | — | | | — | |
| Operating leases | 61,682 | | | 3,610 | | | 3,665 | | | 3,699 | | | 3,549 | | | 3,619 | | | 43,540 | |
| Total | $ | 124,394 | | | $ | 57,769 | | | $ | 7,811 | | | $ | 7,762 | | | $ | 3,893 | | | $ | 3,619 | | | $ | 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 among others, affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.
Allowance for Doubtful Accounts
The Company maintained an allowance for doubtful accounts of approximately $35,000 as of December 31, 2017, for estimated losses resulting from the inability of its customers to make required payments. The allowance is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 to 60 days. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the customer.
Inventory Adjustments and Reserves
At the end of each quarter, all facilities review recent sales reports to identify sales price trends that would indicate products or product lines that are being sold below our cost. This would indicate that an adjustment would be required.
During the years ended December 31, 2017 and December 31, 2016, adjustments of $254,000 and $93,000 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.
During the year ended December 31, 2016, an adjustment of $43,000 to inventory cost was required by our Metals Segment mainly due to decreases in nickel prices. Stainless steel, both in its raw material (coil or plate) or finished goods (pipe) state is purchased / sold using a base price plus an additional surcharge which is dependent on current nickel prices. As raw materials are purchased, it is priced to the Company based upon the surcharge at that date. When the selling price of the finished pipe is set for the customer, approximately three months later, the then-current nickel surcharge is used to determine the proper selling prices. A lower of cost or net realizable value 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. An adjustment was not required at December 31, 2017.
The Company establishes inventory reserves for:
Estimated obsolete or unmarketable inventory. As of December 31, 2017 and December 31, 2016, the Company identified inventory items with no sales or expected sales activity for finished goods or no usage for raw materials for a certain period of time. For those inventory items that are not currently being marketed and unable to be sold, a reserve was established for 100 percent of the inventory cost less any estimated scrap proceeds. The Company reserved $411,000 and $697,000 at December 31, 2017 and December 31, 2016, respectively.
Estimated quantity losses. The Company performs an annual physical inventory during the fourth quarter each year. For those facilities that complete their physical inventory before the end of December, a reserve is established for the potential quantity losses that could occur subsequent to their physical. This reserve is based upon the most recent physical inventory results. At December 31, 2017 and December 31, 2016, the Company had $286,000 and $269,000, respectively, reserved for expected physical inventory quantity losses.
Impairment of Long-Lived Assets
The Company continually reviews the recoverability of the carrying value of long-lived assets. Long-lived assets are reviewed for impairment when events or changes in circumstances, also referred to as "triggering events", indicate that the carrying value of a long-lived asset or group of assets (the "Assets") may no longer be recoverable. Triggering events include: a significant decline in the market price of the Assets; a significant adverse change in the operating use or physical condition of the Assets; a significant adverse change in legal factors or in the business climate impacting the Assets' value, including regulatory issues such as
environmental actions; the generation by the Assets of historical cash flow losses combined with projected future cash flow losses; or the expectation that the Assets will be sold or disposed of significantly before the end of the useful life of the Assets.
Business Combinations
Acquisitions are accounted for using the acquisition method of accounting for business combinations in accordance with Generally Accepted Accounting Principles ("GAAP").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).
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 annually in the fourth quarter and whenever circumstances indicate that the carrying value may not be recoverable. The evaluation of impairment involves using eitherby first performing a step zero qualitative approach or a quantitative approach, if required, as outlined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350. The step zero approach allows an entity to first assess qualitative factorsassessment to determine whether it is more likely than not that the Fair Valuefair value of athe reporting unit is less than its carrying value. If an entity cannot make this determination,the reporting unit does not pass the qualitative assessment, then the quantitative approach will be followed.reporting unit's carrying value is compared to its fair value. The quantitative approach involves a comparison of the fair value of the reporting unit in which the goodwill is recorded to its carrying amount. If the reporting unit's fair value exceeds its carrying value, no impairment loss is recognized. However, if the reporting unit's carrying value exceeds its fair value, an impairment charge equal to the difference in the carrying valueunits are estimated using a combination of the goodwill and reporting unit's fair value is recorded. The Company performed the quantitative analysis during the fourth quarter of 2017 which resulted in no impairment of the goodwill recognized of $1,355,000 for the Specialty Chemicals Segment or the goodwill recognized of $4,649,000 for the Metals Segment for the year ended December 31, 2017.
When the quantitative approach is used, in making our determination of fair value of the reporting unit, we rely on the discounted cash flow method.method and the market based approach. This method uses projections of cash flows from the reporting unit.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 ("WACC") 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.
Earn-Out Liability
In connection with the acquisition of MUSA's stainless steel assets on February 28, 2017, the Company is required to make contingent earn-out paymentsDuring 2020, goodwill was allocated to the prior owners based upon actual sales levelsWelded Pipe & Tube reporting unit found within the Metals Segment and the Specialty Chemicals Segment. During the second quarter, third quarter, and fourth quarter of stainless steel pipe and tube (outside diameter of ten inches or less). In accordance with ASC Topic 805, Business Combinations,2020, the Company determined potential indicators of impairment within the fair value of the earn-out liability on the acquisition date using a Monte Carlo simulation model. Future changes to the fair value of the earn-out liability will be determined each quarter-endWelded Pipe & Tube reporting unit existed and charged to income or expense in the “Earn-Out Adjustment” line item in the Consolidated Statements of Operations and Other Comprehensive Income.
Liquidity and Capital Resources
Cash flows provided by continuing operating activities during 2017 and 2016 totaled $2,235,000 and $5,355,000 respectively, a decrease in cash flows of $3,120,000. The significant components of those results are as follows:
Net income from continuing operations for 2017 was $1,341,000. Adding back non-cash, non-operating items, including a) depreciation and amortization expense of $7,738,000, b) the earn-out adjustment of $689,000 and c) deducting the gain on the sale of available for sale securities of $310,000, resulted in favorable cash generation from continuing operations of $9,458,000, an increase of $7,385,000 from $2,073,000 for the prior year. That prior year amount includes a net loss from continuing operations of $6,994,000, plus add backs for non-cash, non-operating items of a) depreciation and amortization of $6,695,000 and b) the loss on the sale of property, plant and equipment resulting from the sale-leaseback of $2,372,000.
Accounts receivable from continuing operations used $10,877,000 cash during 2017 as sales increased 48 percent for November and December 2017 compared to the same two months of 2016. Accounts receivable days outstanding remained relatively stable, decreasing from 51.5 days at the end of 2016 to 50.7 days at the end of 2017.
Inventory used $7,088,000 of cash as the Company consciously built inventory at the Bristol Metals-Munhall location from acquisition levels along with higher inventory at other facilities to support increased sales activity. Inventory turns, calculated on a three-month average basis, increased from 1.90 turns at the end of 2016 to 2.51 turns at the end of 2017.
Accounts payable favorably affected cash flows from continuing operations by $7,572,000 in 2017 as higher inventory purchasesinterim goodwill impairment tests were made during November and December of 2017 in the Metals Segment, which increased the 2017 year-end accounts payable balance. Accounts payable days outstanding was consistent at 60 days for both years.
Finally, the change in other assets and accrued expenses resulted mainly from an $11,000,000 non-cash reversal of an accrual recorded during the fourth quarter 2016 for a judgment received on an on-going lawsuit which was initially identified during the Company's due diligence associated with the acquisition of Palmer. During 2017, the plaintiff of the case entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer. The former shareholders of Palmer satisfied the financial conditions specified in their settlement agreement resulting in the plaintiff filing a Release of Final Judgment with the Court.performed. As a result of the release, the $11,000,000 legal liability and corresponding indemnified receivable due from the former shareholders of Palmer were eliminated. This litigation is more fully described in Note 13.
In 2017, the Company's current assets and current liabilities increased $10,143,000 and $615,000, respectively, from the year ended 2016 amounts, which caused working capital for 2017 to increase by $9,528,000 to $74,396,000 from the 2016 total of $64,868,000. The current ratio for the year ended December 31, 2017, increased to 3.2:1 from the 2016 year-end ratio of 3.0:1.
The Company used cash from investing activities during 2017 of $17,401,000. The Bristol Metals-Munhall acquisition during the first quarter 2017 used $11,954,000 and the Company incurred capital asset purchases of $5,279,000. Financing activities during 2017 generated $15,117,000 of cash as the Company borrowed funds during 2017 for the aforementioned acquisition and capital purchases. The Company declared a $0.13 per share dividend during the fourth quarter 2017 which resulted in a use of cash of $1,149,000.
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an asset-based revolving line of credit in the amount of $45,000,000. The maturity date of the Line was February 28, 2019. On October 30, 2017, the Company amended its Credit Agreement with its bank to increase the limit of the Line by $20,000,000 to a maximum of $65,000,000 and extended the maturity date to October 30, 2020. Interest under the Credit Agreement is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement), plus a pre-defined spread. Borrowings under the Credit Agreement are limited to an amount equal to a Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable and inventory. The Company determined the refinancing should be accounted for as a debt modification. The Company incurred lender and third party costs associated with the debt restructuring that were capitalized on the balance sheet while certain other third party costs were expensed.
Pursuant to the Credit Agreement, the Company was required to pledge all of its tangible and intangible properties, including the stock and membership interests of its subsidiaries. In the Credit Agreement, the Company's bank agreed to release its liens on the real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 12.
Covenants under the amended Credit Agreement include maintaining a minimum fixed charge coverage ratio and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. At December 31, 2017, the Company was in compliance with all debt covenants. The Company believes that its current liquidity position is sufficient to meet its needs going forward.
Results of Operations
Comparison of 2017 to 2016 – Consolidated
For the full-year 2017, the net income from continuing operations totaled $1,341,000, or $0.15 per share. This compared to full-year 2016 net loss from continuing operations of $6,994,000, or $0.81 loss per share. For the fourth quarter of 2017these interim impairment tests, the Company recorded net income from continuing operationsgoodwill impairment of $1,017,000, or $0.11 per share. This compares to net loss from continuing operations of $1,436,000, or $0.17 loss per share for fourth quarter of 2016. The full-year and fourth quarter 2017 operating results include an operating loss of $245,000 and an operating profit of $14,000, respectively, due to Bristol Metals-Munhall's operations which was acquired in the first quarter 2017.
Consolidated gross profit from continuing operations increased 66 percent to $28,081,000 in 2017, compared to $16,904,000 in 2016, and, as a percent of sales, increased to 14 percent of sales in 2017 compared to twelve percent of sales in 2016. For the fourth quarter of 2017, consolidated gross profit from continuing operations was $7,663,000, an increase of 108 percent from the fourth quarter of 2016 of $3,684,000. Consolidated gross profit from continuing operations was 15 percent of sales for the fourth
quarter of 2017 and eleven percent of sales for same period of 2016. The increases in dollars and in percentage of sales were attributable$16.2 million related to the Metals Segment as discussed in the Metals Segment ComparisonWelded Pipe and Tube reporting unit.
We conducted our annual impairment test of 2017 to 2016 below.
Consolidated selling, general and administrative expense from continuing operations for 2017 increased by $2,202,000 to $24,875,000, or twelve percent of sales, compared to $22,673,000, or 16 percent of sales for 2016. These costs increased $407,000 during the fourth quarter of 2017 to $5,955,000 compared to $5,548,000 for the same period of 2016 and were eleven percent of sales for the fourth quarter 2017 compared to 17 percent of sales for the fourth quarter of 2016. The dollar increase for both the year and fourth quarter of 2017 when compared to the same periods of 2016 resulted primarily from the inclusion of Bristol Metals-Munhall's selling, general and administrative expenses for the entire year and fourth quarter for 2017. Since Bristol Metals-Munhall was acquired in February 2017, none of its selling, general, and administrative expenses were included in the prior year. This accounted for $1,139,000 and $356,000 of the annual and fourth quarter increase in selling, general and administrative costs for 2017. The remainder of the increase for the year resulted from higher incentive based bonuses, bad debt expense, stock compensation costs and personnel costs, partly offset by lower amortization and one-time sale-leaseback closing costs which were incurred in the prior year. In addition, the Company incurred $795,000 for one-time acquisition related costs mainly associated with the Bristol Metals-Munhall acquisition in 2017 compared to $106,000 of one-time acquisition costs associated with this acquisition in 2016. These costs were $13,000 and $30,000 for the fourth quarters of 2017 and 2016, respectively. All of these items will be discussed in greater detail in the respective sections below.
Comparison of 2016 to 2015 – Consolidated
For the full-year 2016, the net loss from continuing operations totaled $6,994,000, or $0.81 loss per share. This compared to full-year 2015 net loss from continuing operations of $10,269,000, or $1.18 loss per share. For the fourth quarter of 2016 the Company recorded a net loss from continuing operations of $1,436,000, or $0.17 loss per share. This compares to a net loss from continuing operations of $17,717,000, or $2.04 loss per share for fourth quarter of 2015.
Consolidated gross profit from continuing operations decreased 33 percent to $16,904,000 in 2016, compared to $25,319,000 in 2015, and, as a percent of sales, decreased to twelve percent of sales in 2016 compared to 14 percent of sales in 2015. For the fourth quarter of 2016, consolidated gross profit from continuing operations was $3,684,000, an increase of eight percent from the fourth quarter of 2015 of $3,424,000. Consolidated gross profit from continuing operations was eleven percent of sales for the fourth quarter of 2016 and ten percent of sales for same period of 2015. The majority of the changes in dollars and in percentage of sales were attributable to the Metals Segment as discussed in the Metals Segment Comparison of 2016 to 2015 below.
Consolidated selling, general and administrative expense from continuing operations for 2016 increased by $735,000 or three percent to $22,673,000 (16 percent of sales) compared to $21,938,000 (13 percent of sales) for 2015. These costs decreased $78,000 or one percent to $5,548,000 for the fourth quarter of 2016 from $5,626,000 for the same period of 2015 and were 17 percent of sales for the fourth quarter 2016 compared to 16 percent of sales for the fourth quarter of 2015. The increase for the full-year 2016 resulted from higher salaries and wages, directors fees, amortization and sale-leaseback closing costs partly offset by lower professional fees, sales commissions and incentive based bonuses. In addition, the Company incurred $106,000 in 2016 for acquisition costs associated with the Bristol Metals-Munhall acquisition which was finalized in 2017 compared to $500,000 of one-time acquisition costs associated with the Specialty acquisition in 2015. These costs were $30,000 and $46,000 for the fourth quarters of 2016 and 2015, respectively. All of these items will be discussed in greater detail in the respective sections below.
Metals Segment – The following table summarizes operating results from continuing operations and backlogs for the three years indicated.
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| (in thousands) | Amount | | % | | Amount | | % | | Amount | | % |
| Net sales | $ | 152,957 |
| | 100.0 | % | | $ | 90,215 |
| | 100.0 | % | | $ | 114,908 |
| | 100.0 | % |
| Cost of goods sold | 133,452 |
| | 87.2 | % | | 82,676 |
| | 91.6 | % | | 100,077 |
| | 87.1 | % |
| Gross profit | 19,505 |
| | 12.8 | % | | 7,539 |
| | 8.4 | % | | 14,831 |
| | 12.9 | % |
| Selling, general and administrative expense | 14,080 |
| | 9.2 | % | | 12,360 |
| | 13.7 | % | | 12,009 |
| | 10.5 | % |
| Goodwill impairment | — |
| | — | % | | — |
| | — | % | | 17,158 |
| | 14.9 | % |
| Business interruption proceeds | — |
| | — | % | | — |
| | — | % | | (1,246 | ) | | (1.1 | )% |
| (Gain) loss on sale-leaseback | (239 | ) | | (0.1 | )% | | 2,166 |
| | 2.4 | % | | — |
| | — | % |
| Operating income (loss) | $ | 5,664 |
| | 3.7 | % | | $ | (6,987 | ) | | (7.7 | )% | | $ | (13,090 | ) | | (11.4 | )% |
| Year-end backlog - Storage tanks | $ | 17,192 |
| | | | $ | 9,878 |
| | | | $ | 9,964 |
| | |
|
Comparison of 2017 to 2016 – Metals Segment
The Metals Segment's net sales from continuing operations increased 70 percent for the full-year 2017 as compared to the same period of 2016 and net sales for the fourth quarter of 2017 totaled $41,136,000, an increase of 88 percent compared to 2016 net sales of $21,883,000. Excluding Bristol Metals-Munhall, full-year 2017 sales increased 41 percent compared to the same period of 2016 and fourth quarter 2017 sales were 48 percent greater than the same period for 2016.
Stainless steel pipe net sales from continuing operations increased 79 percent and 114 percent for the full-year and fourth quarter, respectively, of 2017 when compared to the same periods of the prior year. Excluding Bristol Metals-Munhall, net sales would have increased 33 percent and 46 percent for the full-year and fourth quarter, respectively, of 2017. The total pipe sales increase for the year resulted from a 88 percent increase in average unit volumes partially offset by a nine percent decrease in average selling price. For the fourth quarter, average unit volumes increased 131 percent while the average selling price decreased 17 percent for 2017 compared to 2016. The lower average selling price for the full-year and fourth quarter resulted from the incremental sales of Bristol Metals-Munhall as their sales of smaller diameter pipe and tube had an unfavorable effect on average selling prices.
Seamless heavy-wall carbon steel pipe and tube sales increased 68 percent and 53 percent for the full-year and fourth quarter, respectively, of 2017 compared to the same periods of the prior year. The full year sales induction was comprised of a 63 percent increase in average unit volumes combined with a five percent increase in average selling price. For the fourth quarter, average unit volumes increased 45 percent while average selling prices increased eight percent. Heavier demand in 2017, primarily related to improvements in the oil and gas sector, drove the sales increase.
Storage tank sales increased 43 percent and 52 percent for the full-year and fourth quarter, respectively, of 2017 when compared to the same periods for the prior year. The full-year increase was comprised of a 15 percent increase in the number of tanks sold and 29 percent increase in average selling price. For the fourth quarter, the storage tank increase resulted from a 21 percent increase in the number of tanks sold combined with a 31 percent decrease in average selling price. The results highlight a move toward higher levels of activity in the Permian Basis and other Palmer of Texas delivery areas, as WTI pricing and other economic indicators have risen throughout the second half of 2017.
The Metals Segment's operating results from continuing operations increased $12,651,000 to an operating profit of $5,664,000 for the full-year 2017 compared to an operating loss of $6,987,000 for 2016. For the fourth quarter, the Metals Segment's operating results from continuing operations increased $4,331,000 to an operating profit of $3,005,000 compared to a loss of $1,326,000 for 2017 compared to 2016, respectively. Current year operating results were affected by the following factors:
| |
a) | The addition of Bristol Metals-Munhall operations as noted above. The full-year 2017 and fourth quarter of 2017 operating results includes $443,000 and $558,000, respectively, for Bristol Metals-Munhall operations. These amounts do not reflect the earn-out adjustment for the year since that expense is not included in the Metals Segment's operating results. |
| |
b) | Nickel prices and resulting surcharges for 304 and 316 alloys experienced a rebound in the fourth quarter when compared to the third quarter of 2017. Surcharges for both alloys increased by $0.14 per pound in the fourth quarter, however, the increase was not sufficient to offset the cumulative impact of third quarter declines, with the Metals Segment experiencing a metal price change loss of $925,000 for the quarter, up from the prior year’s fourth quarter metal price change loss of $194,000. The current quarter’s metal price change loss brought the full year metal price change loss to $2,633,000, compared to the full year 2016 metal price change loss of $5,751,000. |
| |
c) | Year over year changes in volume, pricing and product mix, as noted above, combined for a 36 percent improvement in gross profit margins in 2017 compared to 2016. |
| |
d) | Operating income from both seamless carbon pipe and tube and storage tanks and vessels continued to show solid improvement over the prior year. |
Selling, general and administrative expense from continuing operations increased $1,720,000, or 14 percent for the full-year 2017 when compared to 2016. This expense category was nine percent of sales for 2017 and 14 percent of sales for 2016. For the fourth quarter, selling, general and administrative expense was $3,363,000 (eight percent of sales) in 2017, an increase of $163,000 from $3,200,000 (15 percent of sales) for the same period of 2016. The dollar increase for both the year and fourth quarter of 2017 when compared to the same periods of 2016 resulted primarily from the inclusion of Bristol Metals-Munhall's selling, general and administrative expenses. Since Bristol Metals-Munhall was acquired in February 2017, none of its selling, general, and administrative expenses were included in the prior year. This accounted for $1,139,000 and $356,000 of the annual and fourth quarter increase in selling, general and administrative costs for 2017. The remaining changes in selling, general and administrative expense resulted from incentive bonus expense ($510,000 higher and $6,000 lower for the full-year and fourth quarter, respectively), allocated administrative costs (higher by $312,000 and $78,000 for the full-year and fourth quarter, respectively), professional fees (lower by $284,000 and $23,000 for the full-year and fourth quarter, respectively), loss on sale of fixed assets (higher by
$191,000 and $30,000 for the full-year and fourth quarter, respectively), travel costs (lower by $161,000 and $89,000 for the full-year and fourth quarter, respectively), amortization expense (lower by $120,000 and $30,000 for the full-year and fourth quarter, respectively) and salaries and wages ($86,000 higher and $103,000 lower for the full-year and fourth quarter, respectively).
Comparison of 2016 to 2015 – Metals Segment
The Metals Segment's sales from continuing operations decreased $24,693,000 or 21 percent for the full-year of 2016 compared to the same period of 2015. For the fourth quarter of 2016, Metals Segment sales from continuing operations totaled $21,883,000, a decrease of $537,000 or two percent from $22,420,000 for the fourth quarter of 2015. Sales in prior year periods reflected stronger order shipments across all markets in early 2015, before the precipitous decline in oil prices occurred.
Stainless steel pipe sales from continuing operations decreased 28 percent and 17 percent for the full-year and fourth quarter, respectively, of 2016 when compared to the same periods of the prior year. The pipe sales decrease for the year resulted from a ten percent decrease in average unit volumes and an 18 percent decrease in average selling price. For the fourth quarter, average unit volumes decreased seven percent while the average selling price decreased ten percent for 2016 compared to 2015. Low nickel prices weighed heavily on stainless steel pipe sales throughout most of 2016, with only late year increases having some minor favorable impacts during the fourth quarter. That late year movement resulted in average nickel prices being up 14 percent for the fourth quarter, while the average for the full year of 2016 was down 19 percent, when compared to the same periods of the prior year, respectively.
Seamless heavy-wall carbon steel pipe and tube sales decreased 17 percent while increasing 26 percent for the full-year and fourth quarter, respectively, of 2016 compared to the same periods of the prior year. The full year sales reduction was comprised of a two percent increase in average unit volumes offset by a 19 percent decrease in average selling price. For the fourth quarter, average unit volumes increased 36 percent while average selling prices decreased ten percent. Heavier fourth quarter demand, primarily related to improvements in the oil and gas sector and reduced inventory overhang, drove the sales increase.
Storage tank sales increased one percent and 33 percent for the full-year and fourth quarter, respectively, of 2016 when compared to the same periods for the prior year. The full-year increase was comprised of a 15 percent increase in the number of tanks sold offset by a 14 percent decrease in average selling price. For the fourth quarter, the storage tank increase resulted from a 51 percent increase in the number of tanks sold offset by an 18 percent decrease in average selling price. The results highlight a move toward higher levels of activity in the Permian Basin and other Palmer delivery areas, as WTI pricing and other economic indicators have risen throughout the second half of 2016.
The Metals Segment's operating results from continuing operations increased $6,103,000 to a loss of $6,987,000 for the full-year 2016 compared to an operating loss of $13,090,000 for 2015. For the fourth quarter, the Metals Segment's operating results from continuing operations increased $17,164,000 to a loss of $1,326,000 compared to a loss of $18,490,000 for 2016 compared to 2015, respectively. Current year operating results was affected by the following factors:
| |
a) | The Metals Segment recorded a pre-tax goodwill impairment charge of $17,158,000 in the fourth quarter of 2015. See the "Comparison of 2015 to 2014 - Metals Segment" section for further explanation. |
| |
b) | $2,166,000 in net charges associated with the loss recognized on three Metal Segment properties sold as part of the sale-leaseback transaction that took place during the third quarter. This amount is net of the deferred gain amortization of $60,000 recorded in the fourth quarter 2016. |
| |
c) | Lost contribution margin due to lower volumes across all segments as continued low oil and gas prices, as well as sustained lower levels of customer spending across all industrial classes, had an unfavorable effect on sales and profits for our storage tank and carbon pipe distribution facilities, as well as our stainless steel welded pipe markets. |
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d) | As a result of continued low nickel prices during 2016, the Company experienced metal price change loss of approximately $5,751,000 and $194,000 for the full-year and fourth quarter of 2016. This compares to metal price change loss of approximately $6,872,000 and $2,012,000, respectively, for the same periods of 2015. |
Selling, general and administrative expense from continuing operations increased $351,000, or three percent for the full-year 2016 when compared to 2015. This expense category was 14 percent of sales for 2016 and ten percent of sales for 2015. For the fourth quarter, selling, general and administrative expense was $3,200,000 (15 percent of sales) in 2016, an increase of $345,000 from $2,855,000 (13 percent of sales) for the same period of 2015. The changes in selling, general and administrative expense resulted from higher salaries and wages ($259,000 and $136,000 for the full-year and fourth quarter, respectively), higher sales commissions ($32,000 and $174,000 for the full-year and fourth quarter, respectively), higher allocated administrative costs ($408,000 and $102,000 for the full-year and fourth quarter, respectively) and higher amortization expense ($181,000 and $45,000 for the full-year and fourth quarter, respectively). These amounts were partially offset by lower incentive bonus expense ($403,000 and $56,000 for the full-year and fourth quarter, respectively) and lower professional fees ($129,000 and $147,000 for the full-year and fourth quarter, respectively).
Specialty Chemicals Segment – The following tables summarize operating results for the three years indicated. Reference should be made to Note 15 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
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| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| (Amounts in thousands) | Amount | | % | | Amount | | % | | Amount | | % |
| Net sales | $ | 48,191 |
| | 100.0 | % | | $ | 48,351 |
| | 100.0 | % | | $ | 60,552 |
| | 100.0 | % |
| Cost of goods sold | 39,217 |
| | 81.4 | % | | 38,884 |
| | 80.4 | % | | 50,064 |
| | 82.7 | % |
| Gross profit | 8,974 |
| | 18.6 | % | | 9,467 |
| | 19.6 | % | | 10,488 |
| | 17.3 | % |
| Selling, general and administrative expense | 4,678 |
| | 9.7 | % | | 4,579 |
| | 9.5 | % | | 4,823 |
| | 8.0 | % |
| (Gain) loss on sale-leaseback | (95 | ) | | (0.2 | )% | | 206 |
| | 0.4 | % | | — |
| | — | % |
| Operating income | $ | 4,391 |
| | 9.1 | % | | $ | 4,682 |
| | 9.7 | % | | $ | 5,665 |
| | 9.3 | % |
Comparison of 2017 to 2016 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment decreased $161,000 to $48,190,000 for 2017 compared to $48,351,000 in 2016. For the fourth quarter of 2017, sales were $11,701,000, representing a five percent increase from $11,167,000 for the same quarter of 2016. Pounds shipped during the full-year decreased by nine percent for 2017 compared to 2016. For the fourth quarter of 2017, pounds shipped decreased 17 percent. Overall selling prices increased nine percent and 22 percent for the full-year and fourth quarter, respectively, of 2017 compared to the same periods of 2016. Net sales were negatively impacted during the full year and fourth quarter of 2017 by:
a) The loss of a single customer in the second half of 2016 reduced sales in 2017 by approximately $2,100,000.
b) 2017 volume was negatively impacted by the slower than anticipated ramp up of our new fire retardant customer at CRI Tolling. Shipments did commence in the second half of the third quarter and continued to build into the fourth quarter to approximately 60 percent of expected volumes. Our agreement with this customer calls for an annual volume of 3,000,000 pounds, the run rate, which we now expect to achieve in the first quarter of 2018.
c) We experienced some delays in customer deliveries due to weather conditions and an industry wide diminished trucking capacity.
The Specialty Chemicals Segment's operating income for the full-year of 2017 decreased six percent to $4,390,000. The fourth quarter of 2017 decreased 38 percent from the prior year quarter to $594,000. Operating income for the full year 2017 was negatively impacted by an increase to the allowance for doubtful accounts of $239,000 for one customer that became financially unstable and became uncollectable, and $184,000 for the year and $93,000 for the fourth quarter for one-time legal expenses. The decrease in operating income was partially offset by lower incentive based bonuses of $223,000 for the year and $255,000 for the fourth quarter along with a $206,000 charge in the third quarter 2016 associated with the book loss on two Specialty Chemicals Segment properties sold as part of the sale-leaseback transaction closed in 2016 with no comparable loss recognized in 2017.
Selling, general and administrative expense increased $99,000 or two percent in 2017 when compared to 2016, which represented ten percent of sales and nine percent of sales, respectively. For the fourth quarter, selling, general and administrative expense was $877,000 (seven percent of sales) in 2017, a decrease of $191,000 when compared to $1,068,000 (ten percent of sales) for the same period of 2016. These decreases resulted from lower wages and benefits in 2017 ($265,000 and $48,000 lower for the full-year and fourth quarter, respectively) and lower incentive based bonuses ($223,000 and $255,000 lower for the full-year and fourth quarter, respectively) offset by higher bad debt expense ($289,000 and $15,000 higher for the full-year and fourth quarter, respectively), professional fees ($167,000 and $93,000 higher for the full-year and fourth quarter, respectively) and additional corporate costs allocated to the segment ($192,000 and $48,000 higher for the full-year and fourth quarter, respectively).
Comparison of 2016 to 2015 – Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment for the full-year 2016 were $48,351,000, a decrease of $12,201,000 or 20 percent from the full-year 2015 amount of $60,552,000. Sales for the fourth quarter of 2016 were $11,167,000, a $1,978,000 or 15 percent decrease from the same quarter of 2015. Pounds shipped during the full-year decreased 16 percent for 2016 compared to 2015. For the fourth quarter of 2016, pounds shipped decreased 13 percent. Overall selling prices decreased four percent and two percent for the full-year and fourth quarter, respectively, of 2016 compared to the same periods of 2015. Sales were affected during the full-year and fourth quarter of 2016 by:
| |
a) | Lower sales due to in-sourcing of several products by customers who were able to absorb production due to weak demand for their other products, as well as delayed ramp-up of several new products due primarily to customer scheduling; and |
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b) | Lower selling prices per pound for oil based products. With the reduction in oil prices, the Specialty Chemicals Segment's raw material costs decreased, which resulted in lower passed through material value as part of the billed selling prices. |
The Specialty Chemicals Segment's operating income for the full-year of 2016 decreased $983,000 or 17 percent to $4,682,000. The fourth quarter of 2016 decreased eight percent from the prior year quarter to $961,000. The decrease in operating income for the full-year and fourth quarter was directly related to the lower sales levels.
Selling, general and administrative expense decreased $244,000 or five percent in 2016 when compared to 2015. This expense category was nine percent of sales for 2016 and eight percent of sales for 2015. For the fourth quarter, selling, general and administrative expense was $1,068,000 (ten percent of sales) in 2016, an increase of $17,000 from $1,052,000 (eight percent of sales) for the same period of 2015. The changes in selling, general and administrative expense resulted from lower sales commissions in 2016 ($391,000 and $54,000 for the full-year and fourth quarter, respectively) and lower professional fees ($72,000 and $51,000 for the full-year and fourth quarter, respectively), partially or entirely offset by higher allocated administrative costs ($264,000 and $66,000 for the full-year and fourth quarter, respectively) and higher incentive based bonuses ($80,000 and $43,000 for the full-year and fourth quarter, respectively).
Comparison of 2017 to 2016 – Corporate
Corporate expenses increased $384,000 to $6,117,000, or three percent of sales, in 2017 up from $5,733,000, four percent of sales, in 2016. The full-year increase resulted primarily from:
Professional fees increased $148,000 from the prior year resulting from higher audit and banking fees in the current year;
Personnel costs were $145,000 higher as a result of normal annual rate increases;
Performance based bonuses increased $537,000 from the prior year. Pre-defined Adjusted EBITDA targets were achieved in 2017 but were not achieved in 2016; and
Stock grant compensation expense increased $147,000 as a result of awards granted in 2017 in addition to the amendment of the vesting schedules for the May 5, 2016 and February 8, 2017 stock grants awarded from the 2015 Stock Awards Plan.
These increases above were partially offset by:
Shelf registration fees of $145,000 and one-time closing costs associated with the sale leaseback transaction of $165,000 incurred in 2016 that did not recur in 2017;
Lower rent expense as a result of an early lease termination fee of $34,000 incurred in 2016 to move the location of the corporate office located in Richmond, VA; and
Lower directors' fees of $32,000 as a result of one director who did not renew his term for the 2017 year.
Acquisition costs of $795,000 for 2017 and $106,000 for 2016 resulted from costs associated with the MUSA acquisition. See Note 18.
Interest expense was $985,000 and $933,000 for the full-years of 2017 and 2016, respectively. The increase in interest expense during 2017 resulted from an increase in the average debt outstanding as a result of funds used for the acquisition of Bristol Metals-Munhall in the first quarter of 2017.
During the third quarter of 2016, the Company completed a sale-leaseback transaction whereby all of the Company's operating real estate assets were sold to a third party and are being leased back by the Company. The Company received gross sales proceeds of $22,000,000, or approximately $4,230,000 in excess of net book value of total assets sold. Pursuant to the applicable accounting standards, the Company was required to calculate the gain or loss associated with the transaction on a property by property basis. As a result, losses associated with three of the properties in this transaction, totaling $2,455,000, were charged against earnings during the third quarter. Gains associated with the remaining three properties, totaling approximately $6,685,000, were deferred and will be amortized on the straight-line method over the initial lease term of 20 years. Total incremental (benefit) cost associated with the sale-leaseback transaction for 2016 is as follows:
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| | | | | | | | | | | | | | | |
| | 4th Quarter | | Full-Year |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Metals Segment Operating (Income) Loss | $ | (60,000 | ) | | $ | (60,000 | ) | | $ | (239,000 | ) | | $ | 2,166,000 |
|
| Specialty Chemicals Segment Operating (Income) Loss | (24,000 | ) | | (24,000 | ) | | (95,000 | ) | | 206,000 |
|
| Unallocated Corporate Expenses | — |
| | 64,000 |
| | — |
| | 165,000 |
|
| Total incremental costs | $ | (84,000 | ) | | $ | (20,000 | ) | | $ | (334,000 | ) | | $ | 2,537,000 |
|
Comparison of 2016 to 2015 – Corporate
Corporate expenses increased $627,000 to $5,733,000, or four percent of sales, in 2016 up from $5,106,000, three percent of sales, in 2015. The full-year increase resulted primarily from:
Professional fees decreased $192,000 from the prior year resulting from additional professional services obtained in the prior year surrounding registration statement filing, goodwill impairment testing and valuation and SEC comment letter response;
Personnel costs were $590,000 higher as additional personnel were added during the third quarter of 2015 to strengthen the Company's corporate staff combined with normal annual rate increases;
Performance based bonuses increased $220,000 from the prior year. Pre-defined Adjusted EBITDA targets were not achieved in either year. However, the portion of the performance based bonus relating to personal goal achievements was higher in the current year;
One-time closing costs associated with the sale-leaseback transaction increased corporate expenses by $165,000 in 2016. These costs will not recur in future years; and
Directors' fees increased $203,000 for 2016 compared to 2015 as an additional director was added during 2016 along with increases to the annual retainer during 2016.
Acquisition costs of $106,000 for 2016 and $500,000 for 2015 resulted from costs associated with the MUSA and the Specialty acquisition. See Note 18.
Interest expense was $933,000 and $1,353,000 for the full-years of 2016 and 2015, respectively. The decrease in interest expense during 2016 resulted from the company using the proceeds from the September 30, 2016 sale-leaseback transaction to pay off the remaining term loan and lower the outstanding balance of the revolving line of credit.
During the third quarter of 2016, the swap contract entered into on September 3, 2013 was settled leaving only the swap contract entered into on August 12, 2012 outstanding as of December 31, 2016.
Contractual ObligationsOctober 1, 2020 and Other Commitments
2019. As of December 31, 2017,2020 and 2019, we determined that no impairment of the Company's contractual obligations and other commitments were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | | Payment Obligations for the Year Ended |
| | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
| Obligations: | | | | | | | | | | | | | |
| Revolving credit facility | $ | 25,914 |
| | $ | — |
| | $ | — |
| | $ | 25,914 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest on bank debt | 2,401 |
| | 891 |
| | 891 |
| | 619 |
| | — |
| | — |
| | — |
|
| Capital lease | 298 |
| | 85 |
| | 85 |
| | 70 |
| | 39 |
| | 19 |
| | — |
|
| Operating leases | 48,069 |
| | 2,745 |
| | 2,861 |
| | 2,904 |
| | 2,892 |
| | 2,884 |
| | 33,783 |
|
Deferred compensation (1) | 215 |
| | 36 |
| | 21 |
| | 21 |
| | 21 |
| | 17 |
| | 99 |
|
| Total | $ | 76,897 |
| | $ | 3,757 |
| | $ | 3,858 |
| | $ | 29,528 |
| | $ | 2,952 |
| | $ | 2,920 |
| | $ | 33,882 |
|
| |
(1)
| For a description of the deferred compensation obligation, see Note 8 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. |
Current Conditions and Outlook
The Company remains optimistic that its 2018 financial results will surpass those achieved in 2017. The Company's primary end markets continue to point toward increasing demand and improving prices. Any concrete steps to limit importscarrying value of stainless steel
pipe and tube will further improve market dynamicsgoodwill for this
criticalreporting 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 line. The Company also expects the Specialty Chemicals Segment to bounce back from its flat resultslines 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 post both revenue and profit gains as new products are added to its line-up. The Company’s balance sheet is in excellent shape and we have ample borrowing capacity to meet our needs going forward.product pricing.
Item 7A7A. Quantitative and Qualitative Disclosures about Market RisksRisk
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:
At December 31, 2017
•$25,914,00049.0 million under a revolving line of credit with an availability of $30,813,000, expiring on October 30, 2020$11.0 million, maturing December 20, 2021 with a variable interest rate of 3.44 percent.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 $10,500,000$3.8 million which fixes the term loan interest rate at 3.74 percent. The fair value of the interest rate swap contract was an asseta liability to the Company of $128,000.$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. Each month, industry pricing indicesAs of December 31, 2020, the Company had no such hedge contracts in place.
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 published which setmade 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 following month’s price surcharges forstatements. Therefore, even those alloys. The Company typically holds approximately sixsystems determined to seven monthsbe effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of inventory,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 fixed priced purchase orders (where the alloy pricing indexpolicies 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 “locked”, eliminatinga 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 exposure) consistingannual 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 approximately 50 percentDecember 31, 2020.
This Annual Report does not include an attestation report of held stainless steel inventories.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 eventual sales pricesmaterial weakness has been remediated as of December 31, 2020.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on the ConsolidatedFinancial 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 approximately 50 percent of held stainless steel inventories will vary until a customer order commitment is received,the years then ended, and the selling pricerelated 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 established. The Company’s downside exposure is limitedto 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 potentialCompany 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 totalaudit 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.
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 nickel contracts would be reducedearn-out liabilities. We involved valuation professionals with specialized skills and knowledge, who utilized third-party market research tools to zero, if nickel pricing does not declineassist in the evaluation of the revenue projections by comparing third-party market data to the contracted strike prices. The program is designed to mitigate but not eliminate the Company's nickel pricing exposure. The Company had a hedge position equal to 1,351,000 of pounds of nickel, representing 53 percent ofCompany’s revenue projections.
/s/ KPMG LLP
We have served as the Company’s total nickel content of stainless steel pounds in inventory at December 31, 2017. The fair value of the nickel contracts at December 31, 2017 was an asset of approximately $9,000.auditor since 2015.
Richmond, Virginia
March 9, 2021
Item 88. Financial Statements and Supplementary Data
The Company's consolidated financial statements, related notes, report of management and report of the independent registered public accounting firm follow on subsequent pages of this report.Index to Financial Statements
SYNALLOY CORPORATION
Consolidated Balance Sheets
As of December 31, 20172020 and December 31, 2016 |
| | | | | | | |
| | 2017 | | 2016 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 14,706 |
| | $ | 62,873 |
|
| Accounts receivable, less allowance for doubtful accounts of $35,000 and $82,000, respectively | 28,704,481 |
| | 18,028,946 |
|
| Inventories, net | | | |
| Raw materials | 37,748,316 |
| | 31,973,073 |
|
| Work-in-process | 9,491,408 |
| | 9,897,857 |
|
| Finished goods | 24,885,457 |
| | 18,928,579 |
|
| Total inventories, net | 72,125,181 |
| | 60,799,509 |
|
| Prepaid expenses and other current assets | 6,802,072 |
| | 7,272,569 |
|
| Indemnified contingencies - see Note 13 | — |
| | 11,339,888 |
|
| Total current assets | 107,646,440 |
| | 97,503,785 |
|
| | | | |
| Property, plant and equipment, net | 35,080,009 |
| | 27,324,092 |
|
| Goodwill | 6,003,525 |
| | 1,354,730 |
|
| Intangible assets, net | 10,880,521 |
| | 12,308,838 |
|
| Deferred charges, net and other non-current assets | 263,655 |
| | 146,618 |
|
| | | | |
| Total assets | $ | 159,874,150 |
| | $ | 138,638,063 |
|
| | | | |
| Liabilities and Shareholders' Equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 24,256,812 |
| | $ | 16,684,508 |
|
| Accrued expenses | 8,993,454 |
| | 15,950,787 |
|
| Total current liabilities | 33,250,266 |
| | 32,635,295 |
|
| | | | |
| Long-term debt | 25,913,557 |
| | 8,804,206 |
|
| Long-term portion of earn-out liability | 3,170,099 |
| | — |
|
| Long-term deferred sale-leaseback gain | 5,933,350 |
| | 6,267,623 |
|
| Deferred income taxes | 635,910 |
| | 1,609,492 |
|
| Other long-term liabilities | 1,270,542 |
| | 728,892 |
|
| | | | |
| Shareholders' equity | | | |
| Common stock, par value $1 per share - authorized 24,000,000 shares; issued 10,300,000 shares | 10,300,000 |
| | 10,300,000 |
|
| Capital in excess of par value | 35,193,152 |
| | 34,714,206 |
|
| Retained earnings | 58,129,382 |
| | 57,936,533 |
|
| Accumulated other comprehensive loss | (10,864 | ) | | — |
|
| | 103,611,670 |
| | 102,950,739 |
|
| Less cost of common stock in treasury - 1,566,769 and 1,630,690 shares, respectively | 13,911,244 |
| | 14,358,184 |
|
| Total shareholders' equity | 89,700,426 |
| | 88,592,555 |
|
| Commitments and contingencies – see Note 13 |
| |
|
| | | | |
| Total liabilities and shareholders' equity | $ | 159,874,150 |
| | $ | 138,638,063 |
|
(in thousands, except par value and share data)
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 236 | | | $ | 626 | |
| Accounts receivable, net | 28,183 | | | 35,074 | |
| Inventories, net | | | |
| Raw materials | 35,997 | | | 42,643 | |
| Work-in-process | 20,304 | | | 17,354 | |
| Finished goods | 28,779 | | | 38,189 | |
| Total inventories, net | 85,080 | | | 98,186 | |
| | | |
| Prepaid expenses and other current assets | 13,384 | | | 13,229 | |
| | | |
| Total current assets | 126,883 | | | 147,115 | |
| | | |
| | | |
| Property, plant and equipment, net | 35,096 | | | 40,690 | |
| Right-of-use assets, operating leases, net | 31,769 | | | 35,772 | |
| Goodwill | 1,355 | | | 17,558 | |
| Intangible assets, net | 11,426 | | | 15,714 | |
| | | |
| Deferred charges, net | 455 | | | 348 | |
| Total assets | $ | 206,984 | | | $ | 257,197 | |
| | | |
| Liabilities and Shareholders' equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 19,732 | | | $ | 21,150 | |
| Accrued expenses and other current liabilities | 6,123 | | | 6,037 | |
| Current portion of long-term debt | 875 | | | 4,000 | |
| Current portion of earn-out liability | 3,434 | | | 5,576 | |
| Current portion of operating lease liabilities | 867 | | | 3,562 | |
| Current portion of finance lease liabilities | 19 | | | 253 | |
| Total current liabilities | 31,050 | | | 40,578 | |
| | | |
| Long-term debt | 60,495 | | | 71,554 | |
| Long-term portion of earn-out liability | 287 | | | 3,578 | |
| Long-term portion of operating lease liabilities | 32,771 | | | 33,723 | |
| Long-term portion of finance lease liabilities | 37 | | | 336 | |
| Deferred income taxes | 1,957 | | | 790 | |
| Other long-term liabilities | 92 | | | 127 | |
| | | |
| 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 | 37,719 | | | 37,407 | |
| Retained earnings | 42,835 | | | 70,552 | |
| | | |
| | 90,854 | | | 118,259 | |
| Less cost of common stock in treasury - 1,123,319 and 1,257,784 shares, respectively | 10,559 | | | 11,748 | |
| Total shareholders' equity | 80,295 | | | 106,511 | |
| Commitments and contingencies – see Note 12 | 0 | | 0 |
| | | |
| Total liabilities and shareholders' equity | $ | 206,984 | | | $ | 257,197 | |
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Consolidated Statements of Operations and Other Comprehensive IncomeLoss
YearsFor the years ended December 31, 2017, 2020 and 2019
(in thousands, except per share data)
| | | | | | | | | | | | | |
| | 2020 | | 2019 | | |
| Net sales | $ | 256,000 | | | $ | 305,168 | | | |
| Cost of sales | 233,348 | | | 274,395 | | | |
| Gross profit | 22,652 | | | 30,773 | | | |
| | | | | |
| Selling, general and administrative expense | 28,718 | | | 32,627 | | | |
| Acquisition related costs | 845 | | | 601 | | | |
| Proxy contest costs | 3,105 | | | 0 | | | |
| Earn-out adjustments | (1,195) | | | (747) | | | |
| Asset impairments | 6,214 | | | 0 | | | |
| Goodwill impairment | 16,203 | | | 0 | | | |
| Gain on lease modification | (171) | | | 0 | | | |
| Operating loss | (31,067) | | | (1,708) | | | |
| Other (income) and expense | | | | | |
| Interest expense | 2,110 | | | 3,818 | | | |
| Change in fair value of interest rate swap | 51 | | | 141 | | | |
| Other, net | (1,255) | | | (1,904) | | | |
| Loss before income taxes | (31,973) | | | (3,763) | | | |
| Benefit from income taxes | (4,706) | | | (727) | | | |
| Net loss and comprehensive loss | (27,267) | | | (3,036) | | | |
| | | | | |
| Net loss per common share: | | | | | |
| Basic | $ | (3.00) | | | $ | (0.34) | | | |
| Diluted | $ | (3.00) | | | $ | (0.34) | | | |
| | | | | |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 9,099 | | | 8,983 | | | |
| Diluted | 9,099 | | | 8,983 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 20162020 and December 31, 20152019
(in thousands)
| | | | | | | | | | | | | |
| | 2020 | | 2019 | | |
| Operating activities | | | | | |
| Net loss | $ | (27,267) | | | $ | (3,036) | | | |
| | | | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation expense | 7,572 | | | 7,578 | | | |
| Amortization expense | 3,028 | | | 3,486 | | | |
| Amortization of debt issuance costs | 177 | | | 160 | | | |
| Asset impairments | 6,214 | | | 0 | | | |
| Goodwill impairment | 16,203 | | | 0 | | | |
| Unrealized gain on equity securities | (208) | | | (1,547) | | | |
| Deferred income taxes | 1,167 | | | (773) | | | |
| Proceeds from business interruption insurance | 1,040 | | | 0 | | | |
| Loss (gain) on sale of equity securities | 38 | | | (326) | | | |
| Earn-out adjustments | (1,195) | | | (747) | | | |
Payments of earn-out liabilities in excess of acquisition date fair value
| (292) | | | (448) | | | |
| Provision for (reduction of) losses on accounts receivable | 890 | | | (171) | | | |
| Provision for losses on inventories | 271 | | | 1,617 | | | |
| Loss (gain) on sale of property, plant and equipment | 237 | | | (50) | | | |
| | | | | |
| Non-cash lease expense | 510 | | | 560 | | | |
| Non-cash lease termination loss | 24 | | | 0 | | | |
| Gain on lease modification | (171) | | | 0 | | | |
| Change in fair value of interest rate swap | 51 | | | (141) | | | |
| Issuance of treasury stock for director fees | 345 | | | 304 | | | |
| Stock-based compensation expense | 1,791 | | | 2,091 | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 5,552 | | | 9,696 | | | |
| Inventories | 9,122 | | | 19,962 | | | |
| Other assets and liabilities | (912) | | | 179 | | | |
| Accounts payable | (1,418) | | | (5,323) | | | |
| Accrued expenses | 86 | | | (3,317) | | | |
| Accrued income taxes | (4,877) | | | (1,114) | | | |
| Net cash provided by operating activities | 17,978 | | | 28,640 | | | |
| Investing activities | | | | | |
| Purchases of property, plant and equipment | (3,748) | | | (4,537) | | | |
| Proceeds from sale of property, plant and equipment | 312 | | | 189 | | | |
| Purchases of equity securities | 0 | | | (544) | | | |
| Proceeds from sale of equity securities | 4,430 | | | 1,092 | | | |
| Acquisitions | 0 | | | (21,895) | | | |
| Net cash provided by (used in) investing activities | 994 | | | (25,695) | | | |
| Financing activities | | | | | |
| Repayments on line of credit | (10,184) | | | (17,185) | | | |
| Borrowings from term loan | 0 | | | 20,000 | | | |
| | | | | |
| Payments on long-term debt | (4,000) | | | (3,666) | | | |
| Principal payments on finance lease obligations | (109) | | | (106) | | | |
| Payments for finance lease terminations | (204) | | | 0 | | | |
| Payments on earn-out liabilities | (3,946) | | | (3,627) | | | |
| Payments of deferred financing costs | (284) | | | 0 | | | |
| Proceeds from exercised stock options | 0 | | | 45 | | | |
| | | | | |
| | | | | |
| Repurchase of common stock | (635) | | | 0 | | | |
| Net cash used in financing activities | (19,362) | | | (4,539) | | | |
| Decrease in cash and cash equivalents | (390) | | | (1,594) | | | |
| Cash and cash equivalents at beginning of year | 626 | | | 2,220 | | | |
| Cash and cash equivalents at end of year | $ | 236 | | | $ | 626 | | | |
See accompanying notes to consolidated financial statements.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales | $ | 201,147,682 |
| | $ | 138,565,782 |
| | $ | 175,460,438 |
|
| | | | | | |
| Cost of sales | 173,066,732 |
| | 121,661,303 |
| | 150,141,663 |
|
| | | | | | |
| Gross profit | 28,080,950 |
| | 16,904,479 |
| | 25,318,775 |
|
| | | | | | |
| Selling, general and administrative expense | 24,874,589 |
| | 22,672,872 |
| | 21,937,988 |
|
| Acquisition related costs | 794,983 |
| | 106,227 |
| | 499,761 |
|
| Business interruption proceeds | — |
| | — |
| | (1,246,024 | ) |
| Goodwill impairment | — |
| | — |
| | 17,158,249 |
|
| (Gain) loss on sale-leaseback | (334,273 | ) | | 2,371,778 |
| | — |
|
| Operating income (loss) | 2,745,651 |
| | (8,246,398 | ) | | (13,031,199 | ) |
| Other (income) and expense | |
| |
|
| | |
|
| Interest expense | 985,366 |
| | 932,572 |
| | 1,352,806 |
|
| Change in fair value of interest rate swap | (96,696 | ) | | 12,997 |
| | 41,580 |
|
| Earn-out adjustment | 688,523 |
| | — |
| | (4,897,448 | ) |
| Casualty insurance gain | — |
| | — |
| | (923,470 | ) |
| Other, net | (310,043 | ) | | — |
| | (134,389 | ) |
| Income (loss) before income taxes | 1,478,501 |
| | (9,191,967 | ) | | (8,470,278 | ) |
| Provision for (benefit from) income taxes | 137,139 |
| | (2,198,000 | ) | | 1,799,000 |
|
| | | | | | |
| Net income (loss) from continuing operations | 1,341,362 |
| | (6,993,967 | ) | | (10,269,278 | ) |
| | | | | | |
| Net loss from discontinued operations, net of tax | — |
| | (99,334 | ) | | (1,251,058 | ) |
| | | | | | |
| Net income (loss) | $ | 1,341,362 |
| | $ | (7,093,301 | ) | | $ | (11,520,336 | ) |
| | | | | | |
| Other comprehensive loss, net of tax: | | | | | |
| Unrealized gains on available for sale securities, net of tax of $186,384 | 355,482 |
| | — |
| | — |
|
| Reclassification adjustment for gains included in net | | | | | |
| income, net of tax of $189,633 | (366,346 | ) | | — |
| | — |
|
| Comprehensive income (loss) | $ | 1,330,498 |
| | $ | (7,093,301 | ) | | $ | (11,520,336 | ) |
| | | | | | |
| Net income (loss) per common share from continuing operations: | | | | | |
| Basic | $ | 0.15 |
| | $ | (0.81 | ) | | $ | (1.18 | ) |
| Diluted | $ | 0.15 |
| | $ | (0.81 | ) | | $ | (1.18 | ) |
| |
|
| |
|
| |
|
|
| Net loss per diluted common share from discontinued operations: | |
| | |
| | |
|
| Basic | $ | — |
| | $ | (0.01 | ) | | $ | (0.14 | ) |
| Diluted | $ | — |
| | $ | (0.01 | ) | | $ | (0.14 | ) |
SYNALLOY CORPORATION
Consolidated Statements of Shareholders' Equity
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Cost of Common Stock in Treasury | | Total |
| Balance at January 3, 2015 | $ | 10,300,000 |
| | $ | 34,054,374 |
| | $ | 79,167,323 |
| | $ | — |
| | $ | (14,068,144 | ) | | $ | 109,453,553 |
|
| | | | | | | | | | | | |
| Net loss | — |
| | — |
| | (11,520,336 | ) | | — |
| | — |
| | (11,520,336 | ) |
| Payment of dividends, $0.30 per share | — |
| | — |
| | (2,617,513 | ) | | — |
| | — |
| | (2,617,513 | ) |
| Issuance of 26,118 shares of common stock from the treasury | — |
| | (102,237 | ) | | — |
| | — |
| | 231,290 |
| | 129,053 |
|
| Stock options exercised for 666 shares, net | — |
| | 2,408 |
| | — |
| | — |
| | 5,894 |
| | 8,302 |
|
| Employee stock option and grant compensation | — |
| | 521,695 |
| | — |
| | — |
| | — |
| | 521,695 |
|
| Purchase of 100,400 shares of common stock | — |
| | — |
| | — |
| | — |
| | (820,460 | ) | | (820,460 | ) |
| Balance at December 31, 2015 | 10,300,000 |
| | 34,476,240 |
| | 65,029,474 |
| | — |
| | (14,651,420 | ) | | 95,154,294 |
|
| | | | | | | | | | | | |
| Net loss | — |
| | — |
| | (7,093,301 | ) | | — |
| | — |
| | (7,093,301 | ) |
| Dividend on stock grant forfeiture | — |
| | — |
| | 360 |
| | — |
| | — |
| | 360 |
|
| Issuance of 62,124 shares of common stock from the treasury | — |
| | (221,507 | ) | | — |
| | — |
| | 547,125 |
| | 325,618 |
|
| Employee stock option and grant compensation | — |
| | 459,473 |
| | — |
| | — |
| | — |
| | 459,473 |
|
| Purchase of 29,500 shares of common stock | — |
| | — |
| | — |
| | — |
| | (253,889 | ) | | (253,889 | ) |
| Balance at December 31, 2016 | 10,300,000 |
| | 34,714,206 |
| | 57,936,533 |
| | — |
| | (14,358,184 | ) | | 88,592,555 |
|
| | | | | | | | | | | | |
| Net income | — |
| | — |
| | 1,341,362 |
| | — |
| | — |
| | 1,341,362 |
|
| Other comprehensive loss, net of taxes | — |
| | — |
| | — |
| | (10,864 | ) | | — |
| | (10,864 | ) |
| Payment of dividends, $0.13 per share | — |
| | — |
| | (1,148,513 | ) | | — |
| | — |
| | (1,148,513 | ) |
| Issuance of 58,532 shares of common stock from the treasury | — |
| | (227,939 | ) | | — |
| | — |
| | 515,409 |
| | 287,470 |
|
| Stock options exercised for 5,389 shares, net | — |
| | 68,469 |
| | — |
| | — |
| | (68,469 | ) | | — |
|
| Employee stock option and grant compensation | — |
| | 638,416 |
| | — |
| | — |
| | — |
| | 638,416 |
|
| Balance at December 31, 2017 | $ | 10,300,000 |
| | $ | 35,193,152 |
| | $ | 58,129,382 |
| | $ | (10,864 | ) | | $ | (13,911,244 | ) | | $ | 89,700,426 |
|
Consolidated Statements of Cash Flows
YearsFor the years ended December 31, 2017, December 31, 20162020 and December 31, 20152019
(in thousands, except share and per share data)
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Operating activities | | | | | |
| Net income (loss) | $ | 1,341,362 |
| | $ | (7,093,301 | ) | | $ | (11,520,336 | ) |
| Income from discontinued operations, net of tax | — |
| | 99,334 |
| | 1,251,058 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| | |
|
| Depreciation expense | 5,294,695 |
| | 4,235,203 |
| | 4,356,911 |
|
| Amortization expense | 2,443,117 |
| | 2,459,787 |
| | 2,277,480 |
|
| Non-cash interest expense on debt issuance costs | 60,529 |
| | 72,290 |
| | 120,521 |
|
| Goodwill impairment | — |
| | — |
| | 17,158,249 |
|
| Deferred income taxes | (1,037,183 | ) | | (1,407,462 | ) | | 150,462 |
|
| Gain on sale of available for sale securities | (310,043 | ) | | — |
| | — |
|
| Earn-out adjustments | 688,523 |
| | — |
| | (4,897,448 | ) |
| Provision for (reduction of) losses on accounts receivable | 201,641 |
| | (45,151 | ) | | 60,855 |
|
| Provision for losses on inventories | 1,196,428 |
| | 983,505 |
| | 2,003,885 |
|
| Loss (gain) on sale of property, plant and equipment | 25,730 |
| | 2,294,917 |
| | (18,277 | ) |
| Amortization of deferred gain on sale-leaseback | (334,273 | ) | | (83,569 | ) | | — |
|
| Straight line lease cost on sale-leaseback | 397,071 |
| | 101,633 |
| | — |
|
| Casualty insurance gain | — |
| | — |
| | (923,470 | ) |
| Change in cash value of life insurance | — |
| | 1,502 |
| | (82,504 | ) |
| Change in fair value of interest rate swap | (96,696 | ) | | 12,997 |
| | 41,581 |
|
| Issuance of treasury stock for director fees | 287,500 |
| | 330,000 |
| | 118,762 |
|
| Employee stock option and grant compensation | 638,416 |
| | 459,473 |
| | 521,695 |
|
| Dividend on stock grant forfeiture | — |
| | 360 |
| | — |
|
| Changes in operating assets and liabilities: | |
| | |
| | |
|
| Accounts receivable | (10,877,176 | ) | | (37,676 | ) | | 11,380,941 |
|
| Inventories | (7,088,100 | ) | | 2,032,621 |
| | 4,173,337 |
|
| Other assets and liabilities | 11,229,799 |
| | (11,767,808 | ) | | (653,420 | ) |
| Accounts payable | 7,572,308 |
| | 4,418,578 |
| | (9,122,368 | ) |
| Accrued expenses | (9,424,395 | ) | | 9,582,445 |
| | (2,059,303 | ) |
| Accrued income taxes | 26,197 |
| | (1,294,557 | ) | | 3,038,362 |
|
| Net cash provided by continuing operating activities | 2,235,450 |
| | 5,355,121 |
| | 17,376,973 |
|
| Net cash used in discontinued operating activities | — |
| | (3,843,137 | ) | | (849,974 | ) |
| Net cash provided by operating activities | 2,235,450 |
| | 1,511,984 |
| | 16,526,999 |
|
| Investing activities | |
| | |
| | |
|
| Purchases of property, plant and equipment | (5,278,608 | ) | | (3,044,411 | ) | | (10,905,230 | ) |
| Proceeds from sale of property, plant and equipment | 72,789 |
| | 22,215,362 |
| | 21,500 |
|
| Purchases of available for sale securities | (4,382,865 | ) | | — |
| | — |
|
| Proceeds from available for sale securities | 4,141,564 |
| | — |
| | — |
|
Acquisition of the stainless pipe and tube assets of Marcegaglia USA, Inc.
| (11,953,513 | ) | | (3,000,000 | ) | | — |
|
| Proceeds from casualty insurance | — |
| | — |
| | 1,219,048 |
|
| Proceeds from life insurance policies | — |
| | 1,502,283 |
| | 720,518 |
|
| Net cash (used in) provided by investing activities | (17,400,633 | ) | | 17,673,234 |
| | (8,944,164 | ) |
| Financing activities | |
| | |
| | |
|
| Net borrowings from line of credit | 17,109,351 |
| | 6,928,640 |
| | 990,929 |
|
| Payments on long-term debt | — |
| | (26,068,228 | ) | | (4,700,570 | ) |
| Payments on capital lease obligation | (124,999 | ) | | (65,966 | ) | | (13,355 | ) |
| Payments on earn-out liability to MUSA sellers | (518,456 | ) | | — |
| | — |
|
| Payments of debt issuance costs | (200,367 | ) | | (54,326 | ) | | (65,367 | ) |
| Proceeds from exercised stock options | — |
| | — |
| | 8,302 |
|
| Dividends paid | (1,148,513 | ) | | — |
| | (2,617,513 | ) |
| Purchase of common stock | — |
| | (253,889 | ) | | (820,460 | ) |
| Net cash provided by (used in) financing activities | 15,117,016 |
| | (19,513,769 | ) | | (7,218,034 | ) |
| (Decrease) increase in cash and cash equivalents | (48,167 | ) | | (328,551 | ) | | 364,801 |
|
| Cash and cash equivalents at beginning of year | 62,873 |
| | 391,424 |
| | 26,623 |
|
| Cash and cash equivalents at end of year | $ | 14,706 |
| | $ | 62,873 |
| | $ | 391,424 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Capital in Excess of
Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Cost of Common Stock in Treasury | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance December 31, 2018 | $ | 10,300 | | | $ | 36,521 | | | $ | 68,965 | | | $ | 0 | | | $ | (13,302) | | | $ | 102,484 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | (3,036) | | | — | | | — | | | (3,036) | |
| Cumulative-effect adjustment related to ASU 2016-02, net of tax | — | | | — | | | 4,623 | | | — | | | — | | | 4,623 | |
| Issuance of 162,869 shares of common stock from the treasury | — | | | (1,217) | | | — | | | — | | | 1,521 | | | 304 | |
| Stock options exercised for 3,628 shares, net | — | | | 12 | | | — | | | — | | | 33 | | | 45 | |
| Stock-based compensation | — | | | 2,091 | | | — | | | — | | | — | | | 2,091 | |
| Balance December 31, 2019 | $ | 10,300 | | | $ | 37,407 | | | $ | 70,552 | | | $ | 0 | | | $ | (11,748) | | | $ | 106,511 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | (27,267) | | | — | | | — | | | (27,267) | |
| Cumulative adjustment due to adoption of ASU 2016-13 | — | | | — | | | (450) | | | — | | | — | | | (450) | |
| Issuance of 194,082 shares of common stock from treasury | — | | | (1,479) | | | — | | | — | | | 1,824 | | | 345 | |
| Stock-based compensation | — | | | 1,791 | | | — | | | — | | | — | | | 1,791 | |
| Purchase of common stock | — | | | — | | | — | | | — | | | (635) | | | (635) | |
| Balance December 31, 2020 | $ | 10,300 | | | $ | 37,719 | | | $ | 42,835 | | | $ | 0 | | | $ | (10,559) | | | $ | 80,295 | |
See accompanying notes to consolidated financial statements.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements Note 11: Summary of Significant Accounting Policies
Description of Business
Synalloy Corporation (the "Company"), a Delaware corporation, 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 offices areoffice is located at 4510 Cox Road, Suite 201, Richmond, Virginia 23060.
The Company's business is divided into two2 reportable operating segments, the Metals Segment and the Specialty Chemicals Segment. TheAs of December 31, 2020, the Metals Segment currently operatesoperated as three3 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"). Two other operations, Bristol Fab and Ram-Fab, were sold or closed during 2014; see Note 19. BRISMETWelded Pipe & Tube Operations manufactures stainless steel, galvanized, ornamental stainless steel pipe and specialtube, and other alloy pipe and tube,tube. Palmer manufactures liquid storage solutions and separation equipment andequipment. Specialty is a master distributor of seamless carbon pipe and tube. The Specialty Chemicals Segment operates as one1 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.wholly-owned. The Metals Segment is comprised of three4 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, TexasTexas; and Specialty, located in Mineral Ridge, Ohio and Houston, Texas.The Specialty Chemicals Segment consists of two2 subsidiaries: Manufacturers Soap and Chemical Company ("MS&C")&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. The Company maintains cash balances at financial institutions with strong credit ratings.
Accounts Receivable
Accounts receivable from the sale of products are recorded at net realizable value and the Company generally grants credit to customers on an unsecured basis. Substantially all of the Company's accounts receivable are due from companies located throughout the United States. The Company provides an allowance for doubtful accountscredit losses for projected uncollectableuncollectible amounts. The allowance is based upon an analysis of accounts receivable balances with similar risk characteristics on a reviewcollective basis, considering factors such as the aging of outstanding receivables balances, historical collectionloss experience, current information, and existing economic conditions.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.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Inventories
Inventories areInventory is stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods.
Inventory cost is adjusted when its net realizable value is estimated to be below estimated selling price. 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 $411,157$0.2 million and $697,000 at$0.3 million as of December 31, 20172020 and December 31, 2016,2019, 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. At December 31, 2017 and December 31, 2016, theThe Company had $285,627$0.5 million and $268,579, respectively,$0.4 million reserved for physical inventory quantity losses.losses as of December 31, 2020 and 2019, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provideddetermined 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 ten10 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.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Goodwill and Intangible Assets and Deferred Charges
Goodwill, arising from the excess of purchase price over fair value of net assets of businesses acquired, is not amortized but is reviewed annually, at the reporting unit level, in the fourth quarter for impairment and whenever events or circumstances indicate that the carrying value may not be recoverable. In 2017,During the evaluation involved comparingsecond quarter, third quarter, and fourth quarter of 2020, the estimated fair value, based onCompany 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 discounted cash flow model,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. NaN goodwill impairment was identified as a result of the associated reporting unit to its carrying value, including goodwill. Noannual testing procedures performed for the Specialty Chemicals Segment for the year ended December 31, 2020.
NaN goodwill impairment was identified as a result of the testing procedures performed for the yearsyear ended December 31, 2017 and December 31, 2016.2019.
Intangible assets represent the fair value of intellectual, non-physical assets resulting from business acquisitions. Deferred charges represent other intangible assetsacquisitions and debt issuance costs. Intangible assets are amortized over their estimated useful lives using either an accelerated or straight-line method. Deferred charges are amortized over their estimated useful lives using the straight-line method. Deferred charges are amortizedmethod over a period ranging from three to ten years and intangible assets are amortized over a period ranging from eight to 15 years. The weighted average amortization period for the customer relationships is approximately eleven11 years. Deferred charges
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 0, 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 $21,837,351$31.7 million and $20,708,496 at$32.6 million as of December 31, 20172020 and December 31, 2016,2019, respectively. Accumulated amortization of deferred charges and intangible assets as of December 31, 20172020 and December 31, 20162019 totaled $10,693,175$19.8 million and $8,253,040,$16.6 million, respectively.
Estimated amortization expense for the next five fiscal years based on existing deferred charges and intangible assets is: 2018 - $2,380,950, 2019 - $2,246,816, 2020 - $2,073,384; 2021 - $1,899,298; 2022 - $1,677,948; and thereafter - $865,780. is as follows:
| | | | | | | | |
| (in thousands) | | | | |
| 2021 | 2,721 | | | | |
| 2022 | 2,501 | | | | |
| 2023 | 1,050 | | | | |
| 2024 | 952 | | | | |
| 2025 | 855 | | | | |
| Thereafter | 3,347 | | | | |
| Total | 11,426 | | | | |
The Company recorded amortization expense of $2,443,117, $2,459,787$3.0 million and $2,277,480$3.5 million for 2017, 20162020 and 2015,2019, 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.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Earn-Out LiabilityLiabilities
In connection with the American Stainless acquisition, of Bristol Metals-Munhall on February 28, 2017, the Company is required to make contingentquarterly 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 prior ownersthree-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 uponon 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 ten10 inches or less).
The Company determined the fair value of the earn-out liability onliabilities are estimated by applying the acquisition dateprobability-weighted expected return method using a Monte Carlo simulation model. Future changesmanagement's estimates of pounds to be shipped and future price per unit. Changes to the fair value of the earn-out liability will beliabilities are determined each quarter-end and charged to income or expense in the “Earn-Out Adjustment”Adjustments” line item in the Consolidated Statementsconsolidated statements of Operationsoperations and Other Comprehensive Income.comprehensive loss. See Note 3 for additional information on the Company's earn-out liabilities. Revenue Recognition
RevenueRevenues 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 product salescontracts 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 atas each performance obligation is satisfied. The Company generally determines standalone selling prices based on the time ownershipprices 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 goods transfers tosatisfying the customer andperformance obligation, including amounts which are refundable. See Note 2 - Revenue Recognition for additional information on the earnings process is complete.Company's revenue.Shipping Costs
Shipping costs of approximately $7,502,945, $4,488,041$8.0 million and $5,155,011$10.9 million in 2017, 20162020 and 2015,2019, respectively, are recorded in cost of goods sold.
sold on the consolidated statement of operations and comprehensive loss.
Research and Development Expenses
The Company incurred research and development expense of approximately $556,181, $603,067$0.5 million and $548,257$0.6 million in 2017, 20162020 and 2015,2019, 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 expected to apply to taxable income in fiscal years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities were remeasured at December 22, 2017 as a result of the Tax Act signed into law on December 22,2017. See Note 10 for further explanation.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 the required reserves for any and all uncertain tax provisions.provisions, if necessary. See Note 9 for additional information on the Company's income taxes.
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.
Fair Market ValueLeases
The Company makes estimates of fair valuedetermines whether an arrangement is a lease at contract inception. For leases in accounting for certain transactions, in testingwhich the Company is the lessee, the Company recognizes a right-of-use asset and measuring impairment and in providing disclosures of fair value in itscorresponding lease liability on the consolidated financial statements. The Company determinesbalance sheets equal to the fair values of its financial instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Fair value disclosures for assets and liabilities are grouped in three levels. The levels prioritize the inputs used to measure the fairpresent 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 or liabilities. These levels are: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.
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices that are observable forRight-of-use assets and operating lease liabilities either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are less active.
Level 3 - Unobservable inputs that are supported by little or no market activity for assets or liabilities and includesremeasured upon certain pricing models, discounted cash flow methodologies and similar techniques.
Estimates of fair valuemodifications to leases using
levels 2 and 3 may require judgments as to the
timing and amount of cash flows, discount rates, and other factors requiring significant judgment, and the outcomes may vary widely depending on the selection of these assumptions. The Company's most significant fair value estimates as of December 31, 2017 and December 31, 2016 relate to the purchase price allocation relating to the acquisition of the stainless steel operations of MUSA, earn-out liabilities, nickel forward option contracts, estimating the fairpresent value of the
reporting units in testing goodwillremaining 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
estimating the fair value of the
interest rate swap and providing disclosures ofrespective right-of-use asset. See Note 11 for additional information on the fair values of financial instruments.Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions, primarily for testing goodwill for impairment, determining balances for the earn-out liability and certain employee benefit accruals, estimating fair value of identifiable assets acquired and liabilities assumed as a result of business acquisitions and for establishing reserves on accounts receivable, inventories and environmental issues, that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.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
In May 2014, the FinancialRecently Issued Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers- Adopted
On January 1, 2020, the Company adopted ASU No. 2018-13 Fair Value Measurement (Topic 606)", which changes the criteria for recognizing revenue. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard requires a five-step process for recognizing revenue including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price820): Disclosure Framework - Changes to the performance obligationsDisclosure 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 contractreporting date. The guidance also adds disclosure requirements for changes in unrealized gains and recognizing revenue when (or as)losses for the entity satisfies a performance obligation. Two transition methods are availableperiod included in other comprehensive income for implementingrecurring Level 3 measurements held at the requirementsend of Topic 606: retrospectively for each priorthe reporting period presented or retrospectively withas well as the cumulative effectrange and weighted average of initial application recognized at the datesignificant unobservable inputs used to develop Level 3 fair value measurements. The adoption of initial application. The FASB has issued several amendments to thethis standard which are intended to promote a more consistent application of the principles outlined in the standard. The new standard is effective forby the Company for annual periods in fiscal years beginning after December 15, 2017. The Company will adopt the new guidance on January 1, 2018, using the modified retrospective transition method..
The Company assessed thedid not have a material impact
the new standard will have on the consolidated financial statements
as well as its business processes, internal controls, and accounting policies. As part of its assessment,or footnote disclosures. See Note 3 for further discussion on the Company's fair value measurements.On January 1, 2020, the Company reviewed its contract portfolioadopted ASU No. 2017-04 Intangibles - Goodwill and determined how its contractsOther: Simplifying the Test for Goodwill Impairment. The updated guidance eliminated step two of the goodwill impairment test and specifies that goodwill impairment should be accounted for under Topic 606. Based onmeasured by comparing the assessment performed,fair value of a reporting unit with its carrying amount. Additionally, the company determined that the primary formamount of contractsgoodwill allocated to a reporting unit with customers impacting revenue recognition are individual sales orders.a zero or negative carrying amount of net assets should be disclosed. The Company’s sales orders consistadoption of distinct goods with stand-alone selling prices and are typically completed within 12 months from inception. No significant long-term sales contracts requiring revenue to be recognized over a period of time in excess of one year have been identified.
The main performance obligation included in sales orders is the manufacture and distribution of goods as prescribed by our customers. This performance obligation is satisfied upon the transfer of title of each distinct item, which occurs at a point-in-time. Consistent with manufacturing and distribution industry norms, the Company’s transfer of title of goods is determined by FOB shipping terms. Recognizing revenue in accordance with shipping terms is consistent with the Company’s current revenue recognition policy under ASC Topic 605, therefore we do not expect any significant change in the timing under which we recognize revenue.
Shipping and handling of goods is considered a part of the fulfillment of our performance obligation regardless of whether shipping terms are shipping point or destination. This position is supportedthis standard by the practical expedient provided under Topic 606 which allows a company to account for shipping and handling as activities to fulfill the promise to transfer the good if that methodology is consistently applied. For revenues recognized on orders prior to completion of shipping activities offsetting shipping costs are accrued. This practice is consistent with the Company’s current accounting policy and willCompany did not result in any financial statement impact.
Based on the assessment performed, the Company does not believe the standard will have a material impact on itsthe consolidated financial statements or internal controls overstatements.
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 reporting, other than forinstruments and determined that its trade accounts receivable are subject to the disclosures requirednew 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 standard.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability of lease recognition and disclosure. The update establishesCompany did not have a right of use ("ROU") model which requires lessees to recognize lease contracts with a term greater than one year on the balance sheet as ROU assets and lease liabilities. Leases will be classified as either financing or operating which will determine expense classification and recognition. Topic 842 is effective for fiscal years beginning after December 15, 2018 and must be applied using the modified retrospective approach. Early adoption is permitted. While the Company expects Topic 842 to add material ROU assets and lease liabilities to the consolidated balance sheets related to its current land and building operating leases, it is evaluating other effects that the new standard will haveimpact on the consolidated financial statements.statement of operations and comprehensive loss or cash flows.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On September 30, 2020, the FASB issuedCompany early adopted ASU No. 2016-09, 2019-12 "ImprovementsIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions related to Employee Share-Based Payment Accounting (Topic 718)."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 amendments in this updated guidance include changesmost significant impact to simplify the Codification for several aspectsCompany is the removal of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationa limit on the statementtax benefit recognized on pre-tax losses in interim periods. The adoption of cash flows and was effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company implemented this standard on January 1, 2017 and itby the Company did not have a material effect on the Company'sconsolidated 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.
In January 2017,
Note 2: Revenue Recognition
Revenues are recognized when control of the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifyingpromised goods or services is transferred to our customers upon shipment, in an amount that reflects the Definitionconsideration 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 Business" which provides a new frameworkpoint-in-time.
| | | | | | | | | | | | | | | | | | | | |
| | December 31, | | |
| (in thousands) | | | | 2020 | | 2019 | | | | | | |
| Specialty chemicals | | | | $ | 51,541 | | | $ | 54,090 | | | | | | | |
| Stainless steel pipe and tube | | | | 154,974 | | | 167,907 | | | | | | | |
| Heavy wall seamless carbon steel pipe and tube | | | | 23,670 | | | 30,607 | | | | | | | |
| Fiberglass and steel liquid storage tanks and separation equipment | | | | 5,503 | | | 28,722 | | | | | | | |
| Galvanized pipe and tube | | | | 20,312 | | | 23,842 | | | | | | | |
| Net sales | | | | $ | 256,000 | | | $ | 305,168 | | | | | | | |
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue for determining whether transactions should be accounted foreach performance obligation is based on its stand-alone selling price and revenue is recognized as acquisitions (or disposals) of assets or businesses. Topic 805each performance obligation is effective for fiscal years beginning after December 15, 2017.satisfied. The Company does not believe its implementation will have a material effectgenerally determines stand-alone selling prices based on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment," which requires an entityprices charged to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measuredcustomers using the difference between the carrying amount and the fair value of the reporting unit. Topic 350 is effective for fiscal years beginning after December 15, 2019. The Company electedadjusted market assessment approach or expected cost plus margin.
SYNALLOY CORPORATION
Notes to early adopt the provisions of this ASU in 2017. The implementation of this ASU did not have a material effect on the Company's consolidated financial statements.Consolidated Financial Statements
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. Topic 718 is effective for fiscal years beginning after December 15, 2017. The Company does not believe its implementation will have a material effect on the Company's consolidated financial statements.
Note 23: 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 debt instruments. For short-term instruments, other than those required to be reportedequity investments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value on a recurring basis and for which additional disclosures are included below, management concludedhierarchy requires the historical carrying value is a reasonable estimateuse of observable market data when available. In instances where the inputs used to measure fair value becausefall into different levels of the short periodfair 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 time between the originationsignificance of such instruments and their expected realization. Therefore,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 0 equity securities as of December 31, 2017 and December 31, 2016, 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 interest rate, approximates their fair value.
During 2017, the Company sold shares of Level 1 available for sales securities. Proceeds from the sale totaled $4,141,564 which resulted in a realized gain of $310,043 which is included in other income on the accompanying consolidated statements of operations. As a result of the sale, unrealized gains of $555,979, $366,346 net of taxes, were reclassified out of accumulated other comprehensive income ("AOCI") with the realized gain on sale included in earnings. As of December 31, 2017, the Company has additional available for sale securities with unrealized losses of $14,111, $10,864 net of taxes, which is included in AOCI at December 31, 2017. The Company used the average cost method to determine the realized gain or loss for each transaction.2020. The fair value of available for saleequity securities held by the Company as of December 31, 20172019 was $537,233$4.3 million and is included in prepaid"Prepaid expenses and other current assetsassets" on the accompanying consolidated balance sheets. The Company did not have any available for sale securities held at December 31, 2016.
Level 2: Derivative instruments
The Company has twohad 1 interest rate swap contract, which is classified as a Level 2 financial assetsinstrument as it is not actively traded and liabilities.is valued using pricing models that use observable inputs. The fair value of the interest rate swap contract entered into on August 21, 2012 was a liability of $45,041 and an asset of $127,981 and $31,285 at$6,088 as of December 31, 20172020 and December 31, 2016,2019, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in the swapits fair value wasare recorded into other income (expense) with corresponding offsetting entries to current assets or liabilities, as appropriate, with corresponding offsetting entries to other income (expense).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. It is classified as
Level 2 as it is not actively traded and is valued using pricing models that use observable market inputs. See Note 17 for further discussion of interest rate swap.
To manage the impact on earnings of fluctuating nickel prices, the Company enters into three-month forward option contracts, which are classified as Level 2. At December 31, 2017, the Company had contracts in place with notional quantities totaling 1,351,494 pounds with strike prices ranging from $3.75 to $4.64 per pound. At December 31, 2016, the Company had contracts in place with notional quantities totaling 638,168 pounds with strike prices ranging from $3.92 to $4.38 per pound. The fair value of the option contracts were an asset of $9,027 and $87,283 at December 31, 2017 and December 31, 2016, respectively. The fair value of the contracts was priced using discounted cash flows techniques based on forward curves and volatility levels by asset class determined on the basis of observable market inputs, when available. Changes in their fair value were recorded to cost of goods sold with corresponding offsetting entries to other current assets.3: Contingent consideration (earn-out) liabilities
The fair value of earn-outcontingent consideration liabilities ("earn-out") resulting from the MUSA2019 American Stainless acquisition, discussed in Note 18 is2018 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 Monte Carlo simulation approachprobability-weighted expected return method using management's projectionestimates 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
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
adjusts to reflect the updated fair values. Changes in the estimated presentfair value of the expected payments to be made.
Earn-outearn-out liabilities associated with the acquisitions of Palmer in 2012 and Specialty in 2014 were adjusted to zero during 2015 and gains of approximately $2,483,333 and $2,414,115, respectively, were recognized. The Palmer earn-out period expired August 21, 2015 and the Specialty earn-out period expired on November 22, 2016. No earn-out payments were made in 2015 or 2016.
There were no changesare reflected in the carrying amountresults of operations in the periods in which they are identified. Changes in the fair value of the earn-out liability forliabilities may materially impact and cause volatility in the year ended December 31, 2016. 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 2017:2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | MUSA-Stainless | | MUSA-Galvanized | | American Stainless | | Total |
| Balance December 31, 2018 | $ | 4,252 | | | $ | 3,358 | | | $ | 0 | | | $ | 7,610 | |
| Fair value of the earn-out liability associated with the American Stainless (ASTI) acquisition | 0 | | | 0 | | | 6,366 | | | $ | 6,366 | |
| Earn-out payments during period | (1,634) | | | (712) | | | (1,729) | | | $ | (4,075) | |
| Changes in fair value during the period | (215) | | | (864) | | | 332 | | | $ | (747) | |
| Balance December 31, 2019 | $ | 2,403 | | | $ | 1,782 | | | $ | 4,969 | | | $ | 9,154 | |
| Earn-out payments during period | (1,625) | | | (611) | | | (2,002) | | | $ | (4,238) | |
| Changes in fair value during the period | (403) | | | (230) | | | (562) | | | $ | (1,195) | |
| Balance December 31, 2020 | $ | 375 | | | $ | 941 | | | $ | 2,405 | | | $ | 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 | Significant Unobservable Inputs | Range | Weighted
Average |
| Contingent consideration (earn-out) liabilities | $3,721 | Probability Weighted Expected Return | Discount rate | - | 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.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
|
| | | | |
| Balance at December 31, 2016 | | $ | — |
|
| Fair value of earn-out liability associated with the MUSA acquisition at February 28, 2017 | | 4,663,783 |
|
| Earn-out payments to MUSA sellers | | (518,456 | ) |
| Change in fair value during the period | | 688,523 |
|
| Balance at December 31, 2017 | | $ | 4,833,850 |
|
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 in the years ended December 31, 2017 or December 31, 2016. There have also been no changes in the fair value methodologies used by the Company duringin the years ended December 31, 20172020 or December 31, 2016.2019, respectively.
Note 34: Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | | 2017 | | 2016 | |
| (in thousands) | | (in thousands) | 2020 | | 2019 |
| Land | $ | 62,916 |
| | $ | 62,916 |
| Land | $ | 3 | | | $ | 63 | |
| Leasehold improvements | 544,186 |
| | 120,915 |
| Leasehold improvements | 2,939 | | | 1,921 | |
| Buildings | 412,301 |
| | 641,526 |
| Buildings | 84 | | | 214 | |
| Machinery, fixtures and equipment | 81,229,311 |
| | 66,099,880 |
| Machinery, fixtures and equipment | 100,352 | | | 100,300 | |
| Machinery and equipment under capital lease | 401,077 |
| | 199,767 |
| |
| Construction-in-progress | 2,881,654 |
| | 5,418,397 |
| Construction-in-progress | 2,772 | | | 2,999 | |
| | 85,531,445 |
| | 72,543,401 |
| | 106,150 | | | 105,497 | |
| Less accumulated depreciation | 50,451,436 |
| | 45,219,309 |
| Less accumulated depreciation | 71,054 | | | 64,807 | |
| Property, plant and equipment, net | $ | 35,080,009 |
| | $ | 27,324,092 |
| Property, plant and equipment, net | $ | 35,096 | | | $ | 40,690 | |
The Company recorded depreciation expense of $5,294,695, $4,235,203,$7.6 million for 2020 and $4,356,911 for 2017, 2016 and 2015, respectively. Accumulated depreciation includes $86,357 and $25,341 at December 31, 2017 and December 31, 2016, respectively, for assets acquired under capital leases.2019.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 45: Goodwill
There were noDuring 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 amountvalue by 1.7% and, as such, 0 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 yearquarter 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, 2016.2020.
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 changeincome 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, 0 goodwill impairment was necessary.
Changes in the carrying amount of goodwill by segment for the year ended December 31, 2017 was2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Specialty Chemicals Segment | | Metals Segment | | Total |
| Balance December 31, 2018 | $ | 1,355 | | | $ | 8,445 | | | $ | 9,800 | |
| American Stainless Acquisition | 0 | | | 7,758 | | | $ | 7,758 | |
| Balance December 31, 2019 | $ | 1,355 | | | $ | 16,203 | | | $ | 17,558 | |
| Impairment charges | 0 | | | (16,203) | | | $ | (16,203) | |
| Balance December 31, 2020 | $ | 1,355 | | | $ | 0 | | | $ | 1,355 | |
Note 6: Long-term Debt
|
| | | | | | | | | | | |
| | Specialty Chemicals Segment | | Metals Segment | | Total |
| Balance at December 31, 2016 | $ | 1,354,730 |
| | $ | — |
| | $ | 1,354,730 |
|
| Acquisition of MUSA | — |
| | 4,648,795 |
| | 4,648,795 |
|
| Balance at December 31, 2017 | $ | 1,354,730 |
| | $ | 4,648,795 |
| | $ | 6,003,525 |
|
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| $100 million Revolving line of credit, due December 20, 2021 | $ | 49,037 | | | $ | 59,221 | |
| $20 million Term loan, due February 1, 2024 | $ | 11,458 | | | $ | 12,333 | |
| Current portion of long-term debt | $ | 875 | | | $ | 4,000 | |
| Total long-term debt | $ | 61,370 | | | $ | 75,554 | |
In 2015,Debt Refinancing: On January 15, 2021, the fair valueCompany 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 all reporting units exceeded their carrying value. However,borrowing capacity (the "Facility"). The Facility refinances and replaces the impairmentCompany'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 Specialty and Palmer reporting units was primarily driven by the significant compressionremaining portion of the Company's stock price as a resultfive-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 temporary business declines being experienced in the Metals Segment. These declines primarily related to lower oil prices that caused significantly reduced demand for Palmer and Specialty's products and, secondarily, related to lowered nickel surcharges which affected both pounds shipped and selling prices for the BRISMET reporting unit. Other companies in the oil and gas sector were similarly affected as a result of declining commodity prices. This temporary business decline resulted in a significant gap between the fair value of the Company based on the discounted cash flow analysis and the market capitalization of the Companylong-term debt as of December 31, 2015. Therefore,2020 reflects expected payments during 2021.
In addition to refinancing the Company recorded a goodwill impairment charge of $17,158,249Company's previously existing bank debt, the Facility will be used for the Palmerongoing working capital needs, capital expenditures, and Specialty operations duringgeneral corporate purposes. Interest on the fourth quarter of 2015 resulting in no goodwill remaining in the Metals Segment as of December 31, 2015.
Note 5 Long-term Debt
|
| | | | | | | |
| | 2017 | | 2016 |
| $65,000,000 Revolving line of credit, due October 30, 2020 | $ | 25,913,557 |
| | $ | 8,804,206 |
|
On August 31, 2016, the Company amended its Credit Agreement with its bank to create a new credit facility in the form of an asset-based revolving line of credit in the amount of $45,000,000. The Line was used to refinance and consolidate all previous debt agreements. The maturity dateportion of the Line was February 28, 2019. Interest on the Line wasFacility is calculated using the One Month LIBOR Rate (as defined in the Credit Agreement) plus 1.50%, plus a pre-defined spread.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 Line wereFacility are limited to an amount equal to athe Borrowing Base calculation (as defined in the Credit Agreement) that includes eligible accounts receivable, inventory, machinery and inventory.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. InThe 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 the Company's bank agreedprovides for a minimum fixed charge coverage ratio equal to release its liens on the real estate properties covered by the Purchase and Sale Agreement with Store Funding, as described in Note 12.1.0.
Credit Facilities Prior to Debt Refinance:On October 30, 2017,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
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
term loan in the limitprincipal 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 by $20,000,000is 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 maximum of $65,000,000Borrowing Base calculation that includes eligible accounts receivable and extended the maturity date to October 30, 2020. None of the other provisions of the Credit Agreement were changed as a result of this amendment. Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs.inventory. The Company evaluated this transaction and determined the restructuring should be accounted for as a debt modification. The Company incurred lender and third partythird-party costs associated with the debt restructuring that were capitalized on the balance sheet in non-current assets. Atassets
The Line interest rate was 1.81 percent and 3.50 percent as of December 31, 2017, the Company was in compliance with all debt covenants.
The line of credit interest rates were 3.44 percent2020 and 2.62 percent at December 31, 2017 and December 31, 2016,2019, respectively. Additionally, the Company is required to pay a fee equal to 0.1250.15 percent on the average daily unused amount of the line of creditLine on a quarterly basis. As of December 31, 2017,2020, the amount available for borrowing under the line of creditLine was $56,726,959$60.0 million of which $25,913,557$49.0 million was borrowed, leaving $30,813,402$11.0 million of availability. Average line of creditLine borrowings outstanding during fiscal 20172020 and 20162019 were $27,895,901$60.3 million and $6,830,114$69.1 million with weighted average interest rates of 3.093.50 percent and 2.885.52 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 $856,651$2.0 million and $3.5 million in 2017, $826,4782020 and 2019, respectively.
Principal payments on long-term debt during the next five fiscal years and thereafter are as follows (in thousands):
| | | | | |
2021(1) | 53,037 | |
| 2022 | 4,000 | |
| 2023 | 4,000 | |
| 2024 | 333 | |
| 2025 | 0 | |
| Thereafter | 0 | |
(1)The amounts in 2016the 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 $1,149,163equipment sub-limit which requires repayments of $0.4 million quarterly starting in 2015.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
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 67: Accrued Expenses
Accrued expenses consist of the following:
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| | | |
| Salaries, wages, and commissions | 3,776 | | | 2,972 | |
| | | |
| Taxes, other than income taxes | 133 | | | 406 | |
| Advances from customers | 298 | | | 153 | |
| Insurance | 702 | | | 578 | |
| Professional fees | 272 | | | 265 | |
| | | |
| Warranty reserve | 233 | | | 11 | |
| | | |
| Benefit plans | 238 | | | 242 | |
| Insurance financing liability | 0 | | | 668 | |
| Current portion, capital lease obligation | — | | | 39 | |
| Interest rate swap liability | 45 | | | 0 | |
| Customer rebate liability | 168 | | | 275 | |
| Other accrued items | 258 | | | 428 | |
| Total accrued expenses | $ | 6,123 | | | $ | 6,037 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Indemnified legal judgment (See Note 13) | $ | — |
| | $ | 11,000,000 |
|
| Salaries, wages, and commissions | 3,219,190 |
| | 2,133,814 |
|
| Taxes, other than income taxes | 921,476 |
| | 479,489 |
|
| Current portion of earn-out liability | 1,663,751 |
| | — |
|
| Advances from customers | 184,874 |
| | 571,738 |
|
| Insurance | 372,000 |
| | 209,000 |
|
| Professional fees | 343,706 |
| | 40,073 |
|
| Warranty reserve | 37,771 |
| | 180,000 |
|
| Benefit plans | 208,717 |
| | 159,253 |
|
| Insurance financing liability | 224,961 |
| | 167,724 |
|
| Customer rebate liability | 439,912 |
| | 157,445 |
|
| Current portion, environmental reserves | 549,000 |
|
| 184,887 |
|
| Current portion, deferred gain sale-leaseback | 334,273 |
| | 334,273 |
|
| Other accrued items | 493,823 |
| | 333,091 |
|
| Total accrued expenses | $ | 8,993,454 |
| | $ | 15,950,787 |
|
Note 7 Environmental Compliance Costs8: Stock-Based Compensation
At December 31, 2017 and December 31, 2016, the Company had accrued $549,000 and $589,887, respectively, for remediation costs which, in management's best estimate, is sufficient to satisfy anticipated costsOverview of known remediation requirements as outlined below. Expenditures related to costs currently accrued are not discounted to their present values and are expected to be made over the next year. As a result of the evolving nature of the environmental regulations, the difficulty in estimating the extent and remedy of environmental contamination and the availability and application of technology, the estimated costs for future environmental compliance and remediation are subject to uncertainties and it is not possible to predict the amount or timing of future costs of environmental matters which may subsequently be determined.Stock-Based Compensation Plans
Prior to 1987, the Company utilized certain products at its chemical facilities that are currently classified as hazardous materials. Testing of the groundwater in the areas of the former wastewater treatment impoundments at these facilities disclosed the presence of certain contaminants. In addition, several solid waste management units ("SWMUs") at the plant sites have been identified. During 2014, at the former Augusta, GA plant site, the Georgia Department of Natural Resources, Environmental Protection Division ("EPD") closed the surface impoundment regulated unit since the Company met post-closure clean-up goals and the Company renewed the Corrective Action Permit, which includes a site-wide corrective action plan, long-term monitoring and institutional controls. The Company has accrued $474,000 and $514,887 at December 31, 2017 and December 31, 2016, respectively, for the completiona number of the site-wide corrective action plan,active equity incentive plans under which should be finished by the end of the second quarter of 2018. As part of the Asset Purchase Agreement for the sale of the former Spartanburg facility, the purchaser also agreed to pay for all future annual monitoring and reporting costs at the Augusta facility required by the EPD until the site -wide corrective action plan is completed.
The Company has identified and evaluated two SWMUs at its plant in Bristol, Tennessee that revealed residual groundwater contamination. An Interim Corrective Measures Plan to address the final area of contamination identified was submitted for regulatory approval and was approved in March 2005. The Company has $75,000 accrued at December 31, 2017 and December 31, 2016, to provide for estimated future remedial and cleanup costs.
The Company does not anticipate any insurance recoveries to offset the environmental remediation costs it has incurred. Due to the uncertainty regarding court and regulatory decisions, and possible future legislation or rulings regarding the environment, many insurers will not cover environmental impairment risks, particularly in the chemical industry. Hence, the Company has been unableauthorized to obtain this coverage at an affordable price.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 0 shares remaining available for grants under the currently active equity incentive plans.
Note 8 Deferred Compensation
The Company has deferredrecognized stock-based compensation agreements with certain former officers providingexpense 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 payments2020 and $0.4 million for the longer of ten years or life from age 65. The present value of such vested future payments, $159,080 at December 31, 2017 and $171,015 at December 31, 2016, has been accrued.2019, respectively.
Note 9 Stock Options
2011 Long-Term Incentive Stock Grants and New Stock Issues
A summary of activity in the Company's stock option plans is as follows:
|
| | | | | | | | | | | | | | | |
| | Weighted Average Exercise Price | | Options Outstanding | | Weighted Average Contractual Term (in years) | | Intrinsic Value of Options | | Options Available |
| At January 3, 2015 | $ | 12.25 |
| | 157,295 |
| | 6.9 | | $ | 852,810 |
| | 169,384 |
|
| Granted February 10, 2015 | $ | 16.01 |
| | 32,532 |
| | | | | | (32,532 | ) |
| Exercised | $ | 12.47 |
| | (666 | ) | | | | $ | 1,511 |
| | |
|
| Expired | $ | 14.08 |
| | (15,176 | ) | | | | |
| | 15,176 |
|
| At December 31, 2015 | $ | 12.79 |
| | 173,985 |
| | 6.4 | | $ | — |
| | 152,028 |
|
| Exercised | $ | — |
| | — |
| | | | $ | — |
| |
|
|
| Expired | $ | 16.01 |
| | (937 | ) | | | | |
| | 937 |
|
| At December 31, 2016 | $ | 12.77 |
| | 173,048 |
| | 5.4 | | $ | — |
| | 152,965 |
|
| Exercised | $ | 11.55 |
| | (25,632 | ) | | | | $ | 78,818 |
| | |
| Expired | $ | 15.26 |
| | (1,905 | ) | | | | | | 1,905 |
|
| At December 31, 2017 | $ | 12.96 |
| | 145,511 |
| | 4.6 | | $ | 156,445 |
| | 154,870 |
|
| Exercisable options | $ | 12.45 |
| | 119,861 |
| | 4.2 | | $ | 156,445 |
| | |
|
| | |
| | |
| | | | | | |
|
| Options expected to vest: | |
| | |
| | | | Grant Date Fair Value | | |
|
| At December 31, 2015 | $ | 13.76 |
| | 85,960 |
| | 7.3 | | $ | 6.57 |
| | |
|
| Vested | $ | 12.71 |
| | (41,737 | ) | | | | $ | 6.91 |
| | |
|
| Forfeited options | $ | 16.01 |
| | (937 | ) | | | | | | |
| At December 31, 2016 | $ | 14.72 |
| | 43,286 |
| | 7.1 | | $ | 6.24 |
| | |
|
| Vested | $ | 14.35 |
| | (17,574 | ) | | | | $ | 5.96 |
| | |
| Forfeited options | $ | 15.38 |
| | (62 | ) | | | | | | |
| At December 31, 2017 | $ | 14.72 |
| | 25,650 |
| | 6.5 | | $ | 6.41 |
| | |
The following table summarizes information about stock options outstanding at December 31, 2017:
|
| | | | | | | | | | | | | | | | | | |
| Range of Exercise Prices | | Outstanding Stock Options | | Exercisable Stock Options |
| | Shares | | Weighted Average | | Shares | | Weighted Average Exercise Price |
| | | Exercise Price | | Remaining Contractual Life in Years | | |
| $ | 11.55 |
| | 56,710 |
| | $ | 11.55 |
| | 3.06 | | 56,710 |
| | $ | 11.55 |
|
| $ | 11.35 |
| | 25,076 |
| | $ | 11.35 |
| | 4.10 | | 25,076 |
| | $ | 11.35 |
|
| $ | 13.70 |
| | 27,801 |
| | $ | 13.70 |
| | 5.10 | | 22,084 |
| | $ | 13.70 |
|
| $ | 14.76 |
| | 8,109 |
| | $ | 14.76 |
| | 6.14 | | 4,865 |
| | $ | 14.76 |
|
| $ | 16.01 |
| | 27,815 |
| | $ | 16.01 |
| | 7.11 | | 11,126 |
| | $ | 16.01 |
|
| |
| | 145,511 |
| | |
| | | | 119,861 |
| | |
|
The 2011 Long-Term Incentive Stock Option Plan (the "2011 Plan") is an incentive stock option plan,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. AnyExcept 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 10, 2015,5, 2020 the Company granted options to purchase 32,532Compensation Committee approved stock option grants under the 2011 Plan. Options for a total of 123,500 shares, of its commons stock atwith an exercise price of $16.01$12.995 per share, to participants inwere granted under the 2011 Plan.
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 $6.39.$4.53. The Black-Scholes model for this grant was based on a risk-free interest rate of two1.66 percent, an expected life of seven10 years, an expected
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 0.4638.7 percent and a dividend yield of two1.89 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 | | Weighted
Average
Contractual
Term
(in years) | | Intrinsic
Value of
Options | | Options
Available |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2018 | $ | 14.16 | | | 59,096 | | | 4.8 | | $ | 143,737 | | | 155,845 | |
| Exercised | $ | 12.61 | | | (3,628) | | | | | | | — | |
| | | | | | | | | |
| December 31, 2019 | $ | 14.26 | | | 55,468 | | | 3.8 | | $ | 18,331 | | | 155,845 | |
| Granted February 5, 2020 | $ | 13.00 | | | 123,500 | | | | | | | (123,500) | |
| Granted June 30, 2020 | $ | 7.33 | | | 20,000 | | | | | | | (20,000) | |
| | | | | | | | | |
| Canceled, forfeited, or expired | $ | 13.14 | | | (19,437) | | | | | | | 19,437 | |
| December 31, 2020 | $ | 12.74 | | | 179,531 | | | 7.2 | | $ | 9,402 | | | 31,782 | |
| Exercisable options | $ | 13.77 | | | 86,531 | | | 5.1 | | $ | 0 | | | |
| | | | | | | | | | |
| Options expected to vest: | | | | | | | Grant Date Fair Value | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2018 | $ | 15.83 | | | 9,969 | | | 6.0 | | $ | 6.44 | | | |
| Vested | $ | 15.72 | | | (6,246) | | | | | $ | 6.46 | | | |
| | | | | | | | | |
| December 31, 2019 | $ | 16.01 | | | 3,723 | | | 5.1 | | $ | 6.11 | | | |
| Granted February 5, 2020 | $ | 13.00 | | | 123,500 | | | | | $ | 4.53 | | | |
| Granted June 30, 2020 | $ | 7.33 | | | 20,000 | | | | | $ | 2.59 | | | |
| Vested | $ | 13.24 | | | (34,786) | | | | | $ | 4.68 | | | |
| Canceled, forfeited, or expired | $ | 13.14 | | | (19,437) | | | | | $ | 4.62 | | | |
| December 31, 2020 | $ | 11.78 | | | 93,000 | | | 9.2 | | $ | 5.53 | | | |
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Exercise Prices | | Outstanding Stock Options | | Exercisable Stock Options |
| Shares | | Weighted Average | | Shares | | Weighted Average Exercise Price |
| | Exercise Price | | Remaining Contractual Life in Years | | |
| $ | 11.35 | | | 11,713 | | | $ | 11.35 | | | 1.10 | | 11,713 | | | $ | 11.35 | |
| $ | 13.70 | | | 13,994 | | | $ | 13.70 | | | 2.10 | | 13,994 | | | $ | 13.70 | |
| $ | 14.76 | | | 8,109 | | | $ | 14.76 | | | 3.13 | | 8,109 | | | $ | 14.76 | |
| $ | 16.01 | | | 20,715 | | | $ | 16.01 | | | 4.11 | | 20,715 | | | $ | 16.01 | |
| $ | 13.00 | | | 105,000 | | | $ | 13.00 | | | 9.10 | | 32,000 | | | $ | 13.00 | |
| $ | 7.33 | | | 20,000 | | | $ | 7.33 | | | 9.50 | | 0 | | | $ | 7.33 | |
| | | 179,531 | | | | | | | 86,531 | | | |
There were 0 options exercised by employees and directors in 2020. In 2017 and 2015,2019, options for 25,632 and 6663,628 shares were exercised by employees and directors for an aggregate exercise price of $296,050 and $8,302, respectively. The proceeds received by the Company were generated from the surrender of 20,243 shares previously owned from employees and directors in 2017 and from cash received of $8,302 in 2015. No options were exercised by employees or directors in 2016. $45,734.
At the 2017, 20162020 and 20152019 respective year ends, options to purchase 119,861, 129,76286,531 and 88,02551,745 shares, respectively, with weighted average exercise prices of $12.45, $12.12$13.77 and $11.85,$14.13, respectively, were fully exercisable.
Compensation cost charged against income before taxes for the options was approximately $80,966$0.4 million for 2017, $135,0852020 and $31,186 for 2016 and $278,341 for 2015.2019, respectively. As of December 31, 2017,2020, there was $86,280$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 1.902.14 years.
Restricted Stock Awards
2005 Stock Awards Plan
The Compensation & Long-Term Incentive Committee ("Compensation Committee") of the Board of Directors of the Company approvesapproved stock grants under the Company's 2005 Stock Awards Plan to certain management employees of the Company. The stock grants will vest in 20 percent or 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the grants to vest, the employee must be in the continuous employment of the Company since the date of the grant. Any portion of the grant that has not vested will be forfeited upon termination of employment. Shares representing grants that have not yet vested will be held in escrow by the Company. An employee will not be entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable. On January 5,
2015 3,000 shares, with a market price of $17.95 per share, were granted under the Plan to external consultants of the Company. The Company's 2005 Stock Awards Plan expired on February 3, 2015 at which time no further grants could be awarded. There are outstanding awards under this plan that will vest over the next three years.
The 2015 Stock Awards Plan was approved by the Compensation Committee of the Board of Directors of the Company and authorizesoriginally authorized the issuance of up to 250,000 shares which can be awarded for a period of ten10 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, as discussed below, the stock awards vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of grant from shares held in treasury with the Company. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. AnyExcept 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 19, 2016,6, 2019, the Compensation Committee of the Company's Board of Directors approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 50,06244,949 shares with a market price of $7.51$15.72 per share were granted
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 MayFebruary 5, 2016,2020, the Compensation Committee of the Company's Board of Directors approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 42,19345,418 shares with a market price of $8.05$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 February 8, 2017,November 10, 2020, the Compensation Committee of the Company's Board of Directors approved stock grants under the Company's 2015 Stock Awards Plan to certain management employeesin conjunction with the appointment of the CompanyCompany's Interim President and Chief Executive Officer where 44,68750,000 shares with a market price of $12.30$5.65 per share were granted under the Plan.
Effective May 1, 2017, Under the Company's Board of Directors approved the First Amendment to the 2015 Stock Awards Plan. The amendment grants the Committee the authority to establish and amend vesting schedules for stock awards made pursuant to the 2015 Stock Awards Plan. On May 9, 2017, the Committee approved the amendmentterms of the vesting schedules forassociated employment agreement, two-thirds of the May 5, 2016 and February 8, 2017 stock grants reducing the vestingaward vests over a one-year period from five years to three years. As a resultthe effective date of this amendment, compensation expense increased in 2017 by $75,756 and $67,180, for the five employees receiving grants on May 5, 2016 and eight employees receiving grants on February 8, 2017, respectively.
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:
|
| | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Outstanding at January 3, 2015 | 66,403 |
| | $ | 15.00 |
|
| Granted January 5, 2015 | 3,000 |
| | $ | 17.95 |
|
| Vested | (17,903 | ) | | $ | 13.86 |
|
| Forfeited | (60 | ) | | $ | 13.34 |
|
| Outstanding at December 31, 2015 | 51,440 |
| | $ | 15.57 |
|
| Granted February 19, 2016 | 50,062 |
| | $ | 7.51 |
|
| Granted May 5, 2016 | 42,193 |
| | $ | 8.05 |
|
| Vested | (21,133 | ) | | $ | 13.12 |
|
| Forfeited | (1,260 | ) | | $ | 17.73 |
|
| Outstanding at December 31, 2016 | 121,302 |
| | $ | 10.03 |
|
| Granted February 8, 2017 | 44,687 |
| | $ | 12.30 |
|
| Vested | (34,322 | ) | | $ | 10.45 |
|
| Outstanding at December 31, 2017 | 131,667 |
| | $ | 10.69 |
|
| | | | | | | | | | | |
| Shares | | Weighted Average
Grant Date Fair Value |
| Outstanding December 31, 2018 | 142,174 | | | $ | 11.45 | |
| Granted February 6, 2019 | 44,949 | | | $ | 15.72 | |
| Vested | (84,734) | | | $ | 11.76 | |
| Forfeited | (1,614) | | | $ | 12.44 | |
| Outstanding December 31, 2019 | 100,775 | | | $ | 13.28 | |
| Granted February 5, 2020 | 45,418 | | | $ | 13.00 | |
| Granted November 10, 2020 | 50,000 | | | $ | 5.65 | |
| Vested | (81,233) | | | $ | 12.87 | |
| Forfeited | (17,535) | | | $ | 13.11 | |
| Outstanding December 31, 2020 | 97,425 | | | $ | 11.97 | |
Compensation expense on the grants issued is charged against earnings equally before forfeitures, if any, over a period of 60 months from the date of the grants for grants prior to May 5, 2016, with the offset recorded in Shareholders' Equity. Compensation expense on grants issued after that date is charged against earnings over 36 months. Compensation cost charged against income for the awards was approximately $557,450, $354,538 net of income taxes, or $0.04 per share$1.0 million and $1.4 million for 2017, $324,388, $206,311 net of income taxes, or $0.02 per share for 20162020 and $243,354, $154,773 net of income taxes, or $0.02 per share, for 2015.2019, respectively. As of December 31, 2017,2020, there was $1,073,914$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.
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 |
| Outstanding December 31, 2019 | 77,986 | | | $ | 13.66 | |
Granted(2) | 36,647 | | | $ | 13.00 | |
Vested(3) | (64,711) | | | $ | 13.21 | |
| Forfeited/Canceled | (20,558) | | | $ | 13.73 | |
| Non-vested December 31, 2020 | 29,364 | | | $ | 13.76 | |
(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 theirthe 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 MayDecember 18, 2017, May 5, 20162020 and May 12, 2015,16, 2019, non-employee directors received an aggregate of 24,209, 40,99143,063 and 8,21615,909 shares, respectively, of restricted stock in lieu of total retainer fees of $287,500, $330,000$345,000 and $118,750,$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.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 109: 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 liabilitiesassets and assetsliabilities are as follows at the respective year ends:
| | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 |
| Deferred income tax assets: | | | |
| | | |
| Inventory valuation reserves | 176 | | | 199 | |
| | | |
| Inventory capitalization | 1,120 | | | 1,696 | |
| | | |
| | | |
| | | |
| | | |
| Accrued bonus | 328 | | | 497 | |
| | | |
| State net operating loss carryforwards | 1,669 | | | 1,835 | |
| Federal net operating loss carryforwards | 0 | | | 139 | |
| Equity security mark to market | 0 | | | 217 | |
| | | |
| Lease liabilities | 7,484 | | | 8,945 | |
| Interest limitation carryforwards | 0 | | | 754 | |
| Accrued Federal Insurance Contributions Act ("FICA") deferral | 299 | | | 0 | |
| Intangible asset basis differences | 3,706 | | | 0 | |
| Other | 534 | | | 445 | |
| Total deferred income tax assets | 15,316 | | | 14,727 | |
| Federal & State valuation allowance | (4,243) | | | (1,700) | |
| Total net deferred income tax assets | 11,073 | | | 13,027 | |
| | | |
| Deferred income tax liabilities: | | | |
| Fixed asset basis differences | 5,562 | | | 4,859 | |
| Prepaid expenses | 276 | | | 296 | |
| Lease assets | 7,067 | | | 8,537 | |
| Interest rate swap | 68 | | | 77 | |
| Other | 57 | | | 48 | |
| Total deferred income tax liabilities | 13,030 | | | 13,817 | |
| Deferred income taxes | $ | (1,957) | | | $ | (790) | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred income tax assets: | | | |
| Sale leaseback deferred gain | $ | 1,382,270 |
| | $ | 2,387,309 |
|
| Inventory valuation reserves | 209,745 |
| | 379,005 |
|
| Allowance for doubtful accounts | 7,944 |
| | 28,556 |
|
| Inventory capitalization | 943,203 |
| | 1,780,957 |
|
| Environmental reserves | 124,029 |
| | 199,191 |
|
| Interest rate swap | — |
| | 15,185 |
|
| Warranty accrual | 8,132 |
| | 62,035 |
|
| Deferred compensation | 36,617 |
| | 60,745 |
|
| Accrued bonus | 483,238 |
| | 337,028 |
|
| Accrued expenses | 24,749 |
| | 77,629 |
|
| State net operating loss carryforwards | 2,069,258 |
| | 1,724,843 |
|
| Other | 479,338 |
| | 389,530 |
|
| Total deferred income tax assets | 5,768,523 |
| | 7,442,013 |
|
| Valuation allowance | (2,087,860 | ) | | (1,790,051 | ) |
| Total net deferred income tax assets | 3,680,663 |
| | 5,651,962 |
|
| Deferred income tax liabilities: | | | |
| Tax over book depreciation and amortization | 3,971,816 |
| | 6,946,812 |
|
| Prepaid expenses | 174,322 |
| | 211,300 |
|
| Interest rate swap | 87,016 |
| | — |
|
| Other | 83,419 |
| | 103,342 |
|
| Total deferred income tax liabilities | 4,316,573 |
| | 7,261,454 |
|
| Deferred income taxes | $ | (635,910 | ) | | $ | (1,609,492 | ) |
Significant components of the provision for income taxes from continuing operations are as follows:
| | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | |
| Current: | | | | | |
| Federal | $ | (6,024) | | | $ | (10) | | | |
| State | 23 | | | 57 | | | |
| Total current | (6,001) | | | 47 | | | |
| Deferred: | | | | | |
| Federal | 1,011 | | | (833) | | | |
| State | 284 | | | 59 | | | |
| Total deferred | 1,295 | | | (774) | | | |
| Total | $ | (4,706) | | | $ | (727) | | | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 1,067,490 |
| | $ | (980,495 | ) | | $ | 1,415,142 |
|
| State | 106,832 |
| | 190,230 |
| | 233,626 |
|
| Total current | 1,174,322 |
| | (790,265 | ) | | 1,648,768 |
|
| Deferred: | |
| | |
| | |
|
| Federal | (1,043,384 | ) | | (1,329,302 | ) | | (47,530 | ) |
| State | 6,201 |
| | (78,433 | ) | | 197,762 |
|
| Total deferred | (1,037,183 | ) | | (1,407,735 | ) | | 150,232 |
|
| Total | $ | 137,139 |
| | $ | (2,198,000 | ) | | $ | 1,799,000 |
|
SYNALLOY CORPORATION
Tax benefit from discontinued operations amountedNotes to $51,000 and $651,000 for the fiscal years ended 2016 and 2015, respectively. The Company did not have any discontinued operations for 2017.Consolidated Financial Statements
The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Amount | | % | | Amount | | % | | Amount | | % |
| Tax at U.S. statutory rates | $ | 502,690 |
| | 34.0 | % | | $ | (3,125,382 | ) | | 34.0 | % | | $ | (2,880,574 | ) | | 34.0 | % |
| State income taxes, net of federal tax benefit | 65,546 |
| | 4.4 | % | | (48,842 | ) | | 0.5 | % | | 285,426 |
| | (3.4 | )% |
| State valuation allowance | 8,498 |
| | 0.6 | % | | 95,961 |
| | (1.0 | )% | | 94,068 |
| | (1.1 | )% |
| Life insurance cash surrender value | — |
| | — | % | | 503,700 |
| | (5.5 | )% | | — |
| | — | % |
| Earn-out adjustments | — |
| | — | % | | — |
| | — | % | | (857,061 | ) | | 10.1 | % |
| Manufacturing exemption | (116,980 | ) | | (7.9 | )% | | — |
| | — | % | | (187,604 | ) | | 2.2 | % |
| Stock option compensation | 226 |
| | — | % | | 45,929 |
| | (0.5 | )% | | 94,637 |
| | (1.1 | )% |
| Uncertain tax positions | — |
| | — | % | | — |
| | — | % | | (139,000 | ) | | 1.6 | % |
| Rate change effects | (380,961 | ) | | (25.8 | )% | | — |
| | — | % | | — |
| | — | % |
| Goodwill impairment | — |
| | — | % | | — |
| | — | % | | 5,405,302 |
| | (63.8 | )% |
| Other, net | 58,120 |
| | 4.0 | % | | 330,634 |
| | (3.6 | )% | | (16,194 | ) | | 0.3 | % |
| Total | $ | 137,139 |
| | 9.3 | % | | $ | (2,198,000 | ) | | 23.9 | % | | $ | 1,799,000 |
| | (21.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | |
| Amount | | % | | Amount | | % | | | | |
| Tax at U.S. statutory rates | $ | (6,714) | | | 21.0 | % | | $ | (790) | | | 21.0 | % | | | | |
| State income taxes, net of federal tax benefit | 73 | | | (0.2) | % | | 165 | | | (4.4) | % | | | | |
| Federal and State valuation allowance | 2,541 | | | (7.9) | % | | (60) | | | 1.6 | % | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| CARES Act carryback benefits | (1,123) | | | 3.5 | % | | 0 | | | 0 | % | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Stock option compensation | 65 | | | (0.2) | % | | (155) | | | 4.1 | % | | | | |
| | | | | | | | | | | |
| Executive compensation limitation | 280 | | | (0.9) | % | | 57 | | | (1.5) | % | | | | |
| Other nondeductible expenses | 35 | | | (0.1) | % | | 64 | | | (1.7) | % | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other, net | 137 | | | (0.5) | % | | (8) | | | 0.2 | % | | | | |
| Total | $ | (4,706) | | | 14.7 | % | | $ | (727) | | | 19.3 | % | | | | |
IncomeThe Company made income tax payments of $2,576,515, $991,888$16,000 and $2,250,558 were made$1.2 million in 2017, 20162020 and 2015,2019, respectively. The Company had statehas 0 U.S. Federal net operating loss carryforwards and 0 interest limitation carryforwards at the end of fiscal years 2017 and 20162020 compared with $0.7 million of $49,711,027 and $49,676,851, respectively. These losses will expire between the years of 2018 and 2037. A valuation allowance has been set up against $49,612,725 of these stateU.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 0 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 lossesunderlying deferred tax assets will be realized in the foreseeable future. The portionWhile 0 U.S. federal net operating losses exist as of December 31, 2020, the current year increase in the valuation allowance foris principally related to deferred tax assets created in the netcurrent year associated with the impairment of intangible assets. In addition, on a gross basis the Company had state operating loss carryforwards was $2,064,674of $39.4 million and $1,724,843$43.6 million at December 31, 2017the end of 2020 and December 31, 2016,2019, respectively. In addition, a $23,186The majority of these losses will expire between the years of 2021 and 2038, while certain losses are not subject to expiration. A valuation allowance washas been established for $39.4 million and $40.3 million of these state net operating losses at December 31, 2017 for other deferred tax assets. This resulted in a valuation allowance increasethe end of $297,809 all related to continuing operations.
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 20142015 or state income tax examinations for years before 2013. The Company completed its 2012 and 2013 federal income tax return examination by the Internal Revenue Service during the second quarter of 2015.
2014.
The Company had no uncertain tax position activity during 20172020 or 2016.2019. 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 2017.2020.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was signed into law by the President of the United States, enacting significant changes
SYNALLOY CORPORATION
Notes to the Internal Revenue Code effective January 1, 2018. The Act includes a number of provisions including, but not limited to, a permanent reduction of the U.S. corporate tax rate from 35 percent to 21 percent, eliminating the deduction for domestic production activities, limiting the tax deductibility of interest expense, accelerating the expensing of certain business assets and reducing the amount of executive pay that could qualify as a tax deduction. Many effects of The Act are international in nature, such as the one-time transition tax, base erosion anti-abuse tax and the global intangible low-taxed income tax, and thus would not pertain to the Company as it has no international operations. The Company's net deferred tax liability as of December 31, 2017 was determined based on the new permanently enacted corporate income tax rate of 21 percent. As a result, the 2017 income tax provision was reduced by $380,961 for a one-time non-cash revaluation adjustment of the net deferred tax liabilities.Consolidated Financial Statements
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of The Act. The Company's revaluation of its deferred tax assets and liabilities is provisional and subject to further clarification of the new law, including but not limited to US state conformity that cannot be estimated at this time and measurement of underlying tax basis in certain business assets. The ultimate impact may differ from provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. Further guidance may be forthcoming from federal and state agencies, which could result in additional adjustments. The accounting is expected to be completed no later than the filing of the 2017 U.S. corporate income tax return in 2018.
Note 1110: 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 $18,000$19,500 for 2017.2020. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $6,000$6,500 per year for a maximum of $24,000$26,000 for 2017.2020. 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 theirhis 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 2017, 20162020 and 20152019 the maximum was 100 percent of employee contributions up to a maximum of four4 percent of their eligible compensation. The matching contribution is applied to the employee accounts after each payroll. Matching contributions of approximately $608,473, $516,991$0.4 million and $541,260$0.8 million were made for 2017, 20162020 and 2015,2019, 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. NoNaN discretionary contributions were made to the 401(k)/ESOP Plan in 2017, 20162020 or 2015.2019.
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 $18,000$19,500 for 2017.2020. Under the Economic Growth and Tax Relief Reconciliation Act, employees who are age 50 or older could contribute an additional $6,000$6,500 per year for a maximum of $24,000$26,000 for 2017. The2020. During 2020, the Company contributes threecontributed 3 percent of a participant's eligible compensation from January to July and increased this amount to 4 percent for the remainder of the plan year, regardless of whether the participants contribute to the Bristol Plan. The Company's contributions were $174,229, $136,763$0.2 million for 2020 and $147,005 for 2017, 2016 and 2015,2019, 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. NoNaN discretionary contributions were made to the Bristol Plan in 2017, 20162020 or 2015.2019.
In connectionThe Company maintains a Collective Bargaining Agreement (the "Munhall CBA") with the MUSA acquisition discussed in Note 18, the Company assumed the rights and obligations pursuant to the CBA between MUSA and the United Steel Workers of America, Local Union 5852-22 (the ""Munhall Union"), which represents the employees at the Munhall Union").facility. As a part of this Munhall CBA, the Company assumed the obligation of participating in the Steelworkers Pension Trust, (plan number 499; EIN: 23-6648508), 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 that coincides with the calendar year. Per the most recent available annual funding notice, the plan was at least 8084 percent funded for the plan year ended December 31, 2016.2019. Per the terms of the agreementMunhall CBA the Company contributes 3.754.25 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 5 percent of total contributions to the plan based on contributions for the plan year ended December 31, 2016.2019. The Company's contributions to the Munhall Plan totaled $69,245$0.2 million for the year ended December 31, 2017.2020 and 2019, respectively. Additionally, as part of the CBA with the Munhall Union,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 CBACollective 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 thisthe Mineral Ridge CBA, the Company contributes to union-sponsored defined contribution retirement plans. Contributions relating to these plans were approximately $29,042, $22,256$29,851 and $37,712$28,469 for 2017, 20162020 and 2015,2019, respectively.
Note 1211: Leases
On August 31, 2016, SynalloyThe Company's portfolio of leases contains both finance and its operating subsidiaries ("leases that relate to real estate and manufacturing equipment. Substantially all of the Synalloy Companies") entered into a Purchase and Sale Agreement ("PSA")value of the Company's lease portfolio relates to the Master Lease with Store Capital Acquisitions,Master Funding XII, LLC a Delaware limited liability company and(“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 Acquisitions”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
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 Acquisitions assignedlease 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 rights underportfolio of operating leases because of similar lease characteristics; the PSAresulting 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 ("Store Funding"), prior to closing.
On September 30, 2016,and the Company's sale-leaseback partner, amended and restated the Master Lease, pursuant to which the termsCompany leases the Statesville and conditionsTroutman, NC facilities, purchased by Store Capital from American Stainless on January 1, 2019, for the remainder of the PSA, the Synalloy Companies completed the sale of their real estate properties in Tennessee, South Carolina, Texas and Ohio to Store Funding for a purchase price of $22,000,000. The net book value of the real estate properties sold totaled $17,769,883 and the Company recognized a loss on the sale of certain locations of $2,455,347. The Company also recognized a deferred gain of $6,685,464 on the sale of certain locations which is being amortized on the straight-line method over the initial lease term of 20 years. The deferred gain recognized during the fourth quarter of 2016 totaled $83,568 and reduced the net loss recognized at December 31, 2016years set forth in the accompanying consolidated statements of
operations to $2,371,778. The deferred gain recognized during 2017 totaled $334,273. ConcurrentMaster Lease, with the sale of its real properties, the Company leased back all real properties sold to Store Funding. The closing of the sale-leaseback transaction provided the Company with net proceeds (after transaction-related costs) of $21,925,000. The net proceeds were used to pay down debt under the Company's credit agreement, as described in Note 5.
The initial non-cancellable term of the lease is 20 years, with two2 renewal options of ten10 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 leaseMaster 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 two2 percent. The lease met the operating lease requirements and has been accounted for as such. For each location,
On September 10, 2020, the Company simultaneouslyand 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 sublease with eachThird 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 subsidiary.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 | 8.33 | % |
| Finance Leases | 2.44 | % |
Balance Sheet Presentation
Operating and finance lease amounts included in the consolidated balance sheet are as follows (in thousands):
| | | | | | | | | | | | | | |
| Classification | | Financial Statement Line Item | | December 31, 2020 |
| Assets | | Right-of-use assets, operating leases | | $ | 31,769 | |
| Assets | | Property, plant and equipment, net | | 56 | |
| Current liabilities | | Current portion of lease liabilities, operating leases | | 867 | |
| Current liabilities | | Current portion of lease liabilities, finance leases | | 19 | |
| Non-current liabilities | | Non-current portion of lease liabilities, operating leases | | 32,771 | |
| Non-current liabilities | | Non-current portion of lease liabilities, finance leases | | 37 | |
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
| | | | | |
| (in thousands) | December 31, 2020 |
| Operating lease cost | $ | 4,124 | |
| Finance lease cost: | |
| Reduction in carrying amount of right-of-use assets | 92 | |
| Interest on finance lease liabilities | 24 | |
| Total lease cost | $ | 4,240 | |
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 Company leases office space in Spartanburg, South Carolina and Richmond, Virginia, property for a storage yard in Mineral Ridge, Ohio, manufacturing and warehouse space in Munhall, Pennsylvania and various manufacturing and office equipment at eachamounts of its locations, all under operating leases.
The amount ofundiscounted future minimum lease payments under operating leases are as follows: 2018 - $2,744,596; 2019 - $2,861,487; of December 31, 2020 - $2,903,841; 2021 - $2,892,396; 2022 - $2,883,906; and thereafter - $33,783,129. Rent expense related to operating leases was $3,339,600, $1,143,895 and $685,903 in 2017, 2016 and 2015, respectively.
The Company leases machinery and equipment for its manufacturing facility in Cleveland, Tennessee under capital leases. Future minimum commitments for capital leases are as follows:
| | | | | | | | | | | |
| (in thousands) | Operating | | Finance |
| 2021 | $ | 3,610 | | | $ | 20 | |
| 2022 | 3,665 | | | 15 | |
| 2023 | 3,699 | | | 15 | |
| 2024 | 3,549 | | | 8 | |
| 2025 | 3,619 | | | 0 | |
| Thereafter | 43,540 | | | 0 | |
| Total undiscounted minimum future lease payments | 61,682 | | | 58 | |
| Imputed Interest | 28,044 | | | 2 | |
| Total lease liabilities | $ | 33,638 | | | $ | 56 | |
|
| | | |
| Year ending December 31: | |
| 2018 | $ | 85,464 |
|
| 2019 | 85,464 |
|
| 2020 | 70,080 |
|
| 2021 | 38,781 |
|
| 2022 | 18,407 |
|
| Total minimum lease payments | 298,196 |
|
| Less imputed interest costs | 15,177 |
|
| Present value of net minimum lease payments | $ | 283,019 |
|
The current portion due under the capitalWeighted average remaining lease is included in accrued expensesterms for operating and the long-term portion is included in other long-term liabilities in the accompanying consolidated balance sheetsfinance leases as of December 31, 2017 and2020 are as follows:
| | | | | |
| Operating Leases | 15.47 years |
| Finance Leases | 2.91 years |
During the year ended December 31, 2016.2020, the Company had 0 right-of-use assets recognized in exchange for new operating lease liabilities.
Note 1312: Commitments and Contingencies
The Company is from time-to-time subject to various claims, other possible legal actions for product liability and other damages, and other matters arising out of the normal conduct of the Company's business. No significant claims expenses were incurred during 2017, 2016 or 2015, with the exception of the items discussed below. Any legal costs associated with commitments or contingencies are expensed as incurred.
In January 2014, a Metals Segment customer filed suit against Palmer and Synalloy and another unrelated defendant in Texas state court alleging breach of warranty, among other claims. The plaintiff’s claim for damages did not state a dollar amount. This matter arose out of products manufactured and sold by Palmer prior to the Company’s acquisition of all of Palmer's outstanding stock in August 2012. During August and September 2016, the parties to the lawsuit tried the matter in a bench trial in the District Court of Harris County, Texas, 333rd Judicial District (the “Court”). On December 31, 2016, the Court entered final judgment in favor of the Plaintiff and Synalloy and against Palmer. The Court ordered Palmer to pay the Plaintiff approximately $8,600,000 in damages, plus pre- and post-judgment interest, and approximately $1,040,000 in attorneys’ fees. The Court ruled Synalloy has no liability to the Plaintiff. The former shareholders of Palmer are contractually bound, pursuant to the Stock Purchase Agreement by and among Synalloy and the former shareholders dated August 10, 2012, to hold harmless and indemnify Synalloy and Palmer from any and all costs and damages, including the judgment described above and all associated attorneys' fees, arising out of this matter. At December 31, 2016, the Company recorded $11,000,000 in accrued expenses and current assets to reflect the legal liability and corresponding indemnified receivable due from the former shareholders of Palmer. On June 30, 2017, the plaintiff entered into settlement agreements with Palmer/Synalloy and the former shareholders of Palmer, respectively, pursuant to which, the parties agreed to settle and release the judgment in full. On August 31, 2017, the former shareholders of Palmer satisfied the financial conditions specified in their settlement agreement with the plaintiff, and the plaintiff filed a Release of Final Judgment with the Court. Because the former shareholders of Palmer were contractually bound, pursuant to the Stock Purchase Agreement
by and among Synalloy and the former shareholders dated August 10, 2012, to hold harmless and indemnify Synalloy and Palmer from any and all costs and damages, including the judgment described above and all associated attorneys' fees, arising out of this matter, neither Synalloy nor Palmer contributed to the payments required by the settlement agreements. The legal liability and corresponding indemnified receivable due from the former shareholders of Palmer were reduced to zero at August 31, 2017.
In September 2014, a Metals Segment customer filed suit against Synalloy Fabrication, LLC (discontinued operation) and its surety in the United States District Court for the District of Maryland (Baltimore Division) alleging breach of contract, among other claims. The plaintiff's claim for damages was approximately $3,300,000 plus attorney's fees. This matter arose from a disagreement over the scope of a pipe fabrication project and whether an enforceable contract exists between the parties. On March 11, 2016, the United States District Court of Maryland (Baltimore Division) granted summary judgment regarding liability in favor of the plaintiff by ruling that an enforceable contract existed between the parties and the Company breached the agreement. As a result of this ruling, the remaining issue in the case was the amount of the plaintiff's damages. Consequently, the Company increased the facility closing liability to a level of $3,000,000 for the estimated costs associated with the claim for the year ended December 31, 2015. In June 2016, the matter was settled for damages totaling $3,100,000. As a result, the Company increased the facility closing liability and made a payment of $2,500,000 in June 2016. In September 2016, the remaining balance of $600,000 was paid in full. The amount required to adjust the facility closing reserve as a result of the settlement is included in discontinued operations for 2016 and 2015 in the accompanying consolidated statement of operations.
Other than the environmental contingencies discussed in Note 7 and the matters discussed in this Note 13, managementManagement is not currently aware of any other asserted or unasserted matters which could have a significantmaterial effect on the financial condition or results of operations of the Company.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
Note 14 Earnings13: Loss Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | |
| (in thousands, except per share data) | 2020 | | 2019 | | |
| Numerator: | | | | | |
| Net loss | $ | (27,267) | | | $ | (3,036) | | | |
| | | | | |
| Denominator: | | | | | |
| Denominator for basic earnings per share - weighted average shares | 9,099 | | | 8,983 | | | |
| Effect of dilutive securities: | | | | | |
| Employee stock options and stock grants | 0 | | | 0 | | | |
| Denominator for diluted earnings per share - weighted average shares | 9,099 | | | 8,983 | | | |
| | | | | |
| Net loss per share: | | | | | |
| Basic | $ | (3.00) | | | $ | (0.34) | | | |
| Diluted | $ | (3.00) | | | $ | (0.34) | | | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| Net income (loss) from continuing operations | $ | 1,341,362 |
| | $ | (6,993,967 | ) | | $ | (10,269,278 | ) |
| Net loss from discontinued operations, net of tax | $ | — |
| | $ | (99,334 | ) | | $ | (1,251,058 | ) |
| Denominator: | |
| | |
| | |
|
| Denominator for basic earnings per share - weighted average shares | 8,704,730 |
| | 8,649,745 |
| | 8,710,361 |
|
| Effect of dilutive securities: | |
| | |
| | |
|
| Employee stock options and stock grants | 22,757 |
| | — |
| | — |
|
| Denominator for diluted earnings per share - weighted average shares | 8,727,487 |
| | 8,649,745 |
| | 8,710,361 |
|
| | | | | | |
| Net earnings (loss) per share from continuing operations: | |
| | |
| | |
|
| Basic | $ | 0.15 |
| | $ | (0.81 | ) | | $ | (1.18 | ) |
| Diluted | $ | 0.15 |
| | $ | (0.81 | ) | | $ | (1.18 | ) |
| | | | | | |
| Net loss per share from discontinued operations: | | | | | |
| Basic | $ | — |
| | $ | (0.01 | ) | | $ | (0.14 | ) |
| Diluted | $ | — |
| | $ | (0.01 | ) | | $ | (0.14 | ) |
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 86,524194,576 in 2017, 295,2872020 and 300 in 2016 and 229,025 in 2015,2019, which were not included in the diluted earnings per share calculation as their effect was anti-dilutive.
Note 1514: Industry Segments
The Company's business is divided into two2 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 three3 reporting units including Synalloy Metals, Inc., a wholly-owned subsidiary which owns 100 percent of BRISMET,Welded Pipe & Tube Operations, Palmer and Specialty, both wholly-owned subsidiaries of the Company. BRISMET manufactures pipe and tube from stainless steel and other alloys, Palmer produces fiberglass and steel storage tanks and Specialty is a master distributor of seamless carbon pipe and tube. The Metal Segment's products, some of which are custom-produced to individual orders and required for corrosive and high-purity processes, are used principally by the chemical, petrochemical, pulp and paper, mining, power generation (including nuclear), water and wastewater treatment, liquid natural gas, brewery, food processing, petroleum, pharmaceutical and other industries. Products include pipe, storage tanks, pressure vessels and a variety of other components.Specialty. The Specialty Chemicals Segment operates as one1 reporting unit which includes MS&C, a wholly owned subsidiary of the Company which owns 100 percent of MC and CRI Tolling, a wholly owned subsidiary of the Company. The Specialty Chemicals Segment manufactures a wide variety of specialty chemicals for the carpet, chemical, paper, metals, mining, agricultural, fiber, paint, textile, automotive, petroleum, cosmetics, mattress, furniture, janitorial and other industries. MC manufactures lubricants, surfactants, defoamers, reaction intermediaries and sulfated fats and oils. CRI Tolling provides chemical tolling manufacturing resources to global and regional companies and contracts with other chemical companies to manufacture certain pre-defined products.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, excluding interest expense and income taxes.expenses. Identifiable assets, all of which are located in the United States,U.S., are those assets used in operations by each segment. During 2015, the Company recorded an impairment charge of $17,158,249 of the total Metals Segment's goodwill as a result of the annual impairment analysis performed in the fourth quarter; see Note 4. The Metals Segment's identifiable assets did not include any goodwill in 2016. In relation to the acquisition of the stainless pipe and tube assets of MUSA (see Note 18), the Metals Segment recognized goodwill of $4,648,795 in 2017. The Specialty Chemicals Segment's identifiable assets include goodwill of $1,354,730 in 2017 and 2016. Centralized data processing and accounting expenses are allocated to the two2 segments based upon estimates of their percentage of usage. Unallocated corporate expenses include environmental charges of $37,748, $48,000 and $1,332 for
2017, 2016 and 2015, respectively. Corporate assets consist principally of cash, certain investments and equipment.
The Metals Segment had one customer that accounted for approximately 14 percent of revenues in 2015. There were no customers representing more than ten percentfollowing table summarizes certain information regarding segments of the Metals Segment's revenues in 2017 or 2016. The Specialty Chemicals Segment has one customer that accounted for approximately 23 percent, 25 percent and 31 percent of revenues for 2017, 2016 and 2015. The concentration of sales to this customer declined in 2016 as a result of this customer moving production of the certain products previously produced and sold by the Specialty Chemicals Segment in house. The loss of this customer would have a material adverse effect on the revenues of the Specialty Chemicals Segment and the Company.Company's operations:
In order to establish stronger business relationships, the Metals Segment uses only a few raw material suppliers. Nine suppliers furnish about 80 percent of total dollar purchases of raw materials, with one supplier furnishing 40 percent. However, the Company does not believe that the loss of this supplier would have a materially adverse effect on the Company as raw materials are readily available from a number of different sources, and the Company anticipates no difficulties in fulfilling its requirements. For the Specialty Chemicals Segment, most raw materials are generally available from numerous independent suppliers and about 52 percent of total purchases are from its top 15 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. | | | | | | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | |
| Net sales | | | | | |
| Metals Segment | $ | 204,459 | | | $ | 251,078 | | | |
| Specialty Chemicals Segment | 51,541 | | | 54,090 | | | |
| | $ | 256,000 | | | $ | 305,168 | | | |
| Operating (loss) income | | | | | |
| Metals Segment | $ | (24,599) | | | $ | 3,692 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Specialty Chemicals Segment | 4,033 | | | 2,811 | | | |
| | | | | |
| | | | | |
| | (20,566) | | | 6,503 | | | |
| | | | | |
| Unallocated corporate expenses | 7,917 | | | 8,357 | | | |
| Acquisition related costs | 845 | | | 601 | | | |
| Proxy contest costs | 3,105 | | | 0 | | | |
| Earn-out adjustments | (1,195) | | | (747) | | | |
| Gain on lease modification | (171) | | | 0 | | | |
| Operating loss | (31,067) | | | (1,708) | | | |
| Interest expense | 2,110 | | | 3,818 | | | |
| Change in fair value of interest rate swap | 51 | | | 141 | | | |
| | | | | |
| | | | | |
| | | | | |
| Other income, net | (1,255) | | | (1,904) | | | |
| Loss before income taxes | $ | (31,973) | | | $ | (3,763) | | | |
| | | | | |
| Identifiable assets | | | | | |
| Metals Segment | $ | 141,799 | | | $ | 186,758 | | | |
| Specialty Chemicals Segment | 25,039 | | | 25,428 | | | |
| Corporate | 40,146 | | | 45,011 | | | |
| | | | | |
| | $ | 206,984 | | | $ | 257,197 | | | |
| Depreciation and amortization | | | | | |
| Metals Segment | $ | 8,883 | | | $ | 9,439 | | | |
| Specialty Chemicals Segment | 1,552 | | | 1,461 | | | |
| Corporate | 165 | | | 164 | | | |
| | $ | 10,600 | | | $ | 11,064 | | | |
| Capital expenditures | | | | | |
| Metals Segment | $ | 1,761 | | | $ | 2,812 | | | |
| Specialty Chemicals Segment | 866 | | | 1,157 | | | |
| Corporate | 1,121 | | | 568 | | | |
| | $ | 3,748 | | | $ | 4,537 | | | |
| Sales by product group | | | | | |
| Specialty chemicals | $ | 51,541 | | | $ | 54,090 | | | |
| Stainless steel pipe and tube | 154,974 | | | 167,907 | | | |
| Heavy wall seamless carbon steel pipe and tube | 23,670 | | | 30,607 | | | |
| Fiberglass and steel liquid storage tanks and separation equipment | 5,503 | | | 28,722 | | | |
| Galvanized pipe and tube | 20,312 | | | 23,842 | | | |
| $ | 256,000 | | | $ | 305,168 | | | |
| Geographic sales | | | | | |
| United States | $ | 248,470 | | | $ | 297,808 | | | |
| Elsewhere | 7,530 | | | 7,360 | | | |
| | $ | 256,000 | | | $ | 305,168 | | | |
66
Segment Information:
All values are for continuing operations only. |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales | | | | | |
| Metals Segment | $ | 152,957,195 |
| | $ | 90,214,537 |
| | $ | 114,908,258 |
|
| Specialty Chemicals Segment | 48,190,487 |
| | 48,351,245 |
| | 60,552,180 |
|
| | $ | 201,147,682 |
| | $ | 138,565,782 |
| | $ | 175,460,438 |
|
| Operating income (loss) | |
| | |
| | |
|
| Metals Segment | $ | 5,424,624 |
| | $ | (4,820,374 | ) | | $ | 2,821,879 |
|
| Goodwill impairment | — |
| | — |
| | (17,158,249 | ) |
| Business interruption proceeds | — |
| | — |
| | 1,246,024 |
|
| Gain (loss) on sale-leaseback | 239,604 |
| | (2,166,136 | ) | | — |
|
| Total Metals Segment | 5,664,228 |
| | (6,986,510 | ) | | (13,090,346 | ) |
| Specialty Chemicals Segment | 4,295,576 |
| | 4,887,143 |
| | 5,664,843 |
|
| Gain (loss) on sale-leaseback | 94,669 |
| | (205,642 | ) | | — |
|
| Total Specialty Chemicals Segment | 4,390,245 |
| | 4,681,501 |
| | 5,664,843 |
|
| | 10,054,473 |
| | (2,305,009 | ) | | (7,425,503 | ) |
| Unallocated straight line lease cost | 397,071 |
| | 101,633 |
| | — |
|
| Unallocated corporate expenses | 6,116,768 |
| | 5,733,529 |
| | 5,105,935 |
|
| Acquisition related costs | 794,983 |
| | 106,227 |
| | 499,761 |
|
| Operating income (loss) | 2,745,651 |
| | (8,246,398 | ) | | (13,031,199 | ) |
| Interest expense | 985,366 |
| | 932,572 |
| | 1,352,806 |
|
| Change in fair value of interest rate swap | (96,696 | ) | | 12,997 |
| | 41,580 |
|
| Earn-out adjustments | 688,523 |
| | — |
| | (4,897,448 | ) |
| Casualty insurance gain | — |
| | — |
| | (923,470 | ) |
| Other income, net | (310,043 | ) | | — |
| | (134,389 | ) |
| Income (loss) before income taxes | $ | 1,478,501 |
| | $ | (9,191,967 | ) | | $ | (8,470,278 | ) |
| | | | | | |
| Identifiable assets | |
| | |
| | |
|
| Metals Segment | $ | 130,456,857 |
| | $ | 109,689,477 |
| | |
| Specialty Chemicals Segment | 25,394,078 |
| | 22,907,672 |
| | |
| Corporate | 4,023,215 |
| | 6,040,914 |
| | |
| | $ | 159,874,150 |
| | $ | 138,638,063 |
| | |
| Depreciation and amortization | |
| | |
| | |
|
| Metals Segment | $ | 6,280,681 |
| | $ | 5,132,506 |
| | $ | 5,172,251 |
|
| Specialty Chemicals Segment | 1,302,579 |
| | 1,449,437 |
| | 1,376,167 |
|
| Corporate | 154,552 |
| | 113,047 |
| | 85,973 |
|
| | $ | 7,737,812 |
| | $ | 6,694,990 |
| | $ | 6,634,391 |
|
| Capital expenditures | |
| | |
| | |
|
| Metals Segment | $ | 3,405,552 |
| | $ | 2,198,535 |
| | $ | 7,398,517 |
|
| Specialty Chemicals Segment | 1,649,967 |
| | 475,703 |
| | 3,439,260 |
|
| Corporate | 223,089 |
| | 370,173 |
| | 67,453 |
|
| | $ | 5,278,608 |
| | $ | 3,044,411 |
| | $ | 10,905,230 |
|
| Sales by product group | | | | | |
| Specialty chemicals | $ | 48,190,487 |
| | $ | 48,351,245 |
| | $ | 60,552,180 |
|
| Stainless steel pipe | 100,523,823 |
| | 56,065,642 |
| | 77,849,443 |
|
| Seamless carbon steel pipe and tube | 25,103,641 |
| | 14,913,133 |
| | 18,013,326 |
|
| Liquid storage tanks and separation equipment | 27,599,731 |
| | 19,235,762 |
| | 19,045,489 |
|
| | $ | 201,417,682 |
| | $ | 138,565,782 |
| | $ | 175,460,438 |
|
| Geographic sales | |
| | |
| | |
|
| United States | $ | 196,172,279 |
| | $ | 132,313,157 |
| | $ | 167,185,319 |
|
| Elsewhere | 4,975,403 |
| | 6,252,625 |
| | 8,275,119 |
|
| | $ | 201,147,682 |
| | $ | 138,565,782 |
| | $ | 175,460,438 |
|
Note 16 Quarterly Results (Unaudited)
The following is a summary of quarterly operations for 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2017 | | | | | | | |
| Net sales | $ | 42,203,579 |
| | $ | 51,511,045 |
| | $ | 54,595,924 |
| | $ | 52,837,134 |
|
| Gross profit | 7,403,579 |
| | 8,177,927 |
| | 4,836,620 |
| | 7,662,824 |
|
| Net income (loss) from continuing operations | 701,542 |
| | 829,879 |
| | (1,206,752 | ) | | 1,016,693 |
|
Net income from discontinued operations
| — |
| | — |
| | — |
| | — |
|
| Net income (loss) | 701,542 |
| | 829,879 |
| | (1,206,752 | ) | | 1,016,693 |
|
| Other comprehensive income (loss) | — |
| | 366,346 |
| | (366,346 | ) | | (10,864 | ) |
| Comprehensive income (loss) | — |
| | 1,196,225 |
| | (1,573,098 | ) | | 1,005,829 |
|
| | | | | | | | |
| Per common share | |
| | |
| | |
| | |
|
| Basic | 0.08 |
| | 0.10 |
| | (0.14 | ) | | 0.11 |
|
| Diluted | 0.08 |
| | 0.10 |
| | (0.14 | ) | | 0.11 |
|
| | | | | | | | |
| 2016 | |
| | |
| | |
| | |
|
| Net sales from continuing operations | $ | 36,312,012 |
| | $ | 34,906,668 |
| | $ | 34,297,231 |
| | $ | 33,049,871 |
|
| Gross profit from continuing operations | 4,718,176 |
| | 3,997,594 |
| | 4,504,419 |
| | 3,684,290 |
|
| Net loss from continuing operations (1) | (1,366,732 | ) | | (1,583,395 | ) | | (2,608,276 | ) | | (1,435,564 | ) |
| Loss from discontinued operations, net of tax | — |
| | (99,334 | ) | | — |
| | — |
|
| Net loss | (1,366,732 | ) | | (1,682,729 | ) | | (2,608,276 | ) | | (1,435,564 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
|
| Comprehensive (loss) | (1,366,732 | ) | | (1,682,729 | ) | | (2,608,276 | ) | | (1,435,564 | ) |
| | | | | | | | |
| Per common share from continuing operations | |
| | |
| | |
| | |
|
| Basic | (0.16 | ) | | (0.18 | ) | | (0.30 | ) | | (0.17 | ) |
| Diluted | (0.16 | ) | | (0.18 | ) | | (0.30 | ) | | (0.17 | ) |
| | | | | | | | |
| Per common share from discontinued operations | | | | | | | |
| Basic | — |
| | (0.01 | ) | | — |
| | — |
|
| Diluted | — |
| | (0.01 | ) | | — |
| | — |
|
(1) The Company recorded a loss of $2,455,347 in the third quarter of 2016 associated with the sale-leaseback transaction.
Note 17 Interest Rate Swap
As discussed in Note 5, the Company has an interest rate swap associated with its Line which effectively is expected to offset variable interest in the borrowing; hedge accounting was not utilized. The notional amount of the swap was $10,500,000 and $12,750,000 at December 31, 2017 and December 31, 2016, respectively. Therefore, the fair value is recorded in current assets or liabilities, as appropriate, with corresponding changes to fair value recorded to other income (expense). The Company recorded an asset of $127,981 and $31,285 for the fair value of the Palmer swap at December 31, 2017 and December 31, 2016, respectively.
Note 1815: Acquisitions
Acquisition of the Assets and Operations of American Stainless Steel Pipe and Tube Assets of Marcegaglia USA,Tubing, Inc.
On December 9, 2016,January 1, 2019, ASTI completed the Company's subsidiary Bristol Metals, LLCAmerican Stainless Tubing, Inc. ("BRISMET"), entered into a definitive agreement to acquire the stainless steel pipe and tube assets of MUSA located in Munhall, PA (the "Bristol Metals-Munhall"American Stainless") to enhance its on-going business with additional capacity and technological advantages. The transaction closed on February 28, 2017 and was funded through an increase to the Company's credit facility (See Note 5).acquisition. The purchase price for the transaction, which excludes real estate and certain other assets, totaled $14,953,513.all-cash acquisition was $21.9 million, subject to a post-closing working capital adjustment. The assets purchased from MUSA include inventory, production and maintenance supplies and equipment less specific identified liabilities to be assumed. In accordance with the agreement, on December 9, 2016, BRISMET entered into an escrow agreement and deposited $3,000,000 into the escrow fund. The deposit was remitted to MUSA at the close of the transaction and was reflected as a credit against the purchase price.
A summary of sources and uses of proceeds forCompany funded the acquisition is as follows:
|
| | | |
| Sources of funds: | |
| Borrowings from revolving line of credit | $ | 14,953,513 |
|
| Total sources of funds | $ | 14,953,513 |
|
| | |
|
| Uses of funds: | |
|
| Acquisition of MUSA Stainless assets | $ | 14,953,513 |
|
| Total uses of funds | $ | 14,953,513 |
|
The transaction wasis 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 fourththird quarter of 2017,2019, the Company finalized the purchase price allocation for the Bristol Metals-MunhallAmerican Stainless acquisition.
MUSA will receive quarterly earn-out payments for a period of four years years following closing. Aggregate earn-out payments will be at least $3,000,000, with no maximum. Actual payouts will equate to three percent of BRISMET’s incremental revenue, if any, from the amount of small diameter stainless steel pipe and tube (outside diameter of ten inches or less) sold. At February 28, 2017, the acquisition date, the Company forecasted earn out payments to be $4,063,204, which was discounted to a present value of $3,604,330 using a discount rate applicable to future revenue of five percent. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, the credit risk associated with the payment of the earn-out and the methodology to quantify the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the Monte Carlo simulation approach using management's estimates of pounds shipped.
In the second quarter of 2017, Management adjusted the selling price used in the earn-out calculation associated with the MUSA acquisition. Since this adjustment was determined within the measurement period, the beginning earn-out liability and goodwill were increased by $1,059,453. Goodwill related to Bristol Metals-Munhall increased from $3,589,342 to $4,648,795 and the fair value on contingent consideration was increased from $3,604,330 to $4,663,783. All other changes in fair value have been included as other (income) loss on the Company's consolidated statements of operations.
The total purchase price was allocated to Bristol Metals-Munhall facility's net tangible and identifiable intangible assets based on their estimated fair values as of February 28, 2017. The fair value assigned to the customer list intangible is being amortized on an accelerated basis over 15 years. The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets and liabilities is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining laser millAmerican Stainless' production capabilities acquired as part of Bristol Metals-Munhall with BRISMET'sthe Metals Segment current operations. All of the goodwill recognized was assigned to the Company's Metals SegmentSegment.
During the second quarter of 2019, management identified circumstances that existed on the date of acquisition and is expected to be deductible for income tax purposes.
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 2017:2019:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Initial estimate | | Revisions | | Final |
| Inventories | $ | 5,564 | | | $ | 0 | | | $ | 5,564 | |
| Accounts receivable | 3,534 | | | 0 | | | 3,534 | |
| Other current assets - production and maintenance supplies | 605 | | | 0 | | | 605 | |
| Property, plant and equipment | 2,793 | | | 0 | | | 2,793 | |
| Customer list intangible | 10,000 | | | (496) | | | 9,504 | |
| Goodwill | 7,044 | | | 714 | | | 7,758 | |
| Contingent consideration (earn-out liability) | (6,148) | | | (218) | | | (6,366) | |
| Accounts payable | (1,400) | | | 0 | | | (1,400) | |
| Other liabilities | (97) | | | 0 | | | (97) | |
| $ | 21,895 | | | $ | 0 | | | $ | 21,895 | |
|
| | | | | | | | | | | |
| | Initial | | | | |
| | estimate | | Revisions | | Final |
| Inventories | $ | 5,434,000 |
| | $ | — |
| | $ | 5,434,000 |
|
| Other current assets - production and maintenance supplies | 1,548,701 |
| | — |
| | 1,548,701 |
|
| Equipment | 7,576,733 |
| | — |
| | 7,576,733 |
|
| Customer list intangible | 992,000 |
| | — |
| | 992,000 |
|
| Goodwill | 3,589,342 |
| | 1,059,453 |
| | 4,648,795 |
|
| Earn-out liability | (3,604,330 | ) | | (1,059,453 | ) | | (4,663,783 | ) |
| Other liabilities assumed | (582,933 | ) | | — |
| | (582,933 | ) |
| | $ | 14,953,513 |
| | $ | — |
| | $ | 14,953,513 |
|
Bristol Metals-Munhall's results of operations since acquisition are reflected in the Company's consolidated statements of operations. The amount of Bristol Metals-Munhall's revenues and operating loss included in the consolidated statements of operations forFor the year ended December 31, 20172019, cost of sales included $1.1 million representing the fair value above predecessor cost associated with acquired inventory that was $25,766,689sold 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 $245,408, respectively. The following unaudited pro-forma informationthe repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is providedno guarantee as to presentthe 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 0 shares under the stock repurchase program.
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 summarylimited duration shareholder rights plan expiring on March 31, 2021 and an ownership trigger threshold of 15%. In connection with the combined resultsshareholder rights plan, the Board of Directors authorized and declared a dividend of 1 right (each, a "Right") for each outstanding share of the Company's operations with Bristol Metals-Munhall as ifcommon stock, par value $1.00 per share ("Common Stock") to stockholders of record at the acquisition had occurredclose of business on January 1, 2016.April 10, 2020 (the "Record Date"). The unaudited pro-forma financial information is for information purposes onlycomplete terms of the Rights are set forth in a Rights Agreement dated March 31, 2020 (the "Rights Agreement"), by and is not necessarily indicative of what the results would have been had the acquisition been completed on the date indicated above.
|
| | | | | | | |
| Pro-Forma (Unaudited) |
| | 2017 | | 2016 |
| Pro-forma revenues | $ | 206,071,634 |
| | $ | 161,591,159 |
|
| Pro-forma net income (loss) | 1,441,258 |
| | (9,730,841 | ) |
| Earnings (loss) per share: | | | |
| Basic | 0.17 |
| | (1.12 | ) |
| Diluted | 0.17 |
| | (1.12 | ) |
The pro-forma calculation excludes non-recurring acquisition costs of $698,587 which were incurred bybetween the Company during 2017.and American Stock Transfer & Trust Company, LLC, as rights agent. The stainless steel operationsRights will become exercisable only if a person or group acquires beneficial ownership of MUSA's historical financial results were adjusted15% 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 both years to eliminate interest expense charged by the prior owner. Pro-forma net income was reduced for both years for the amounteach whole share of amortization on Bristol Metal Munhall's customer list intangible and an estimated amount of interest expense associated with the additional line of credit borrowings.Common Stock).
On March 1, 2017, pursuant to the terms and conditions of the MUSA asset purchase agreement,June 27, 2020, the Company entered into a lease agreementAmendment 1 to lease manufacturing and warehouse space at MUSA's Munhall, PA facility for $33,333 per month for the initial lease term of 15 months. In February 2018,Rights Agreement (the "Amendment"). The Amendment terminated the lease was amended to extendRights Agreement by accelerating the termexpiration of the lease forRights to June 28, 2020. At the period beginning June 1, 2018 and ending May 31, 2023 and includes escalating rent payments. The lease mettime of the operating lease requirements and has been accounted for as such; see Note 12.
Note 19 Dispositions and Closures
Associated withtermination of the closureRights Agreement, all of Bristol Fab in 2014, Bristol Fab's collective bargaining agreement with the Union expired andRights, which were distributed to holders of the Company was legally obligated to pay a withdrawal liabilityCompany's common stock, par value, $1.00, pursuant to the Union's pension fund of approximately $1,904,628. This obligation was payable over 26 months ending October 1, 2016 with an interest rate of 4.51 percent.Rights Agreement, expired.
During 2016, the Company successfully completed the items and processes identified when the one-time closing charges were developed. A charge of $99,334 and $1,251,058, net of tax respectively, was recorded as discontinued operations during 2016 and 2015 for a legal claim filed against Synalloy Fabrication as discussed in Note 13. The matter was settled during 2016 and the settlement was paid in full by September 2016. As such, the facility closing reserve was zero as of December 31, 2016. Bristol Fab was reported as a part of the Metals Segment.
The Company's results from discontinued operations are summarized below:
|
| | | | | | | |
| | 2016 | | 2015 |
| Net sales | $ | — |
| | $ | — |
|
| Loss before income taxes | $ | (150,334 | ) | | $ | (1,902,058 | ) |
| Benefit from income taxes | (51,000 | ) | | (651,000 | ) |
| Net loss from discontinued operations | $ | (99,334 | ) | | $ | (1,251,058 | ) |
Note 20 Payment of 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 2017, the Company paid a $0.13 cash dividend on November 6, 2017 for a total of $1,148,513. In 2016, no2020 and 2019, 0 dividends were declared or paid by the Company. In 2015
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 paidCompany’s independent shareholders voted the Company’s proxy card, resulting in 5 (of 8) incumbent Board members being re-elected to the Board of Directors. Due to cumulative voting, a $0.30 cash dividend on December 8, 2015 for a total paymentunique voting method permitted by the Company’s Certificate of $2,617,513.
Note 21 Business Interruption ProceedsIncorporation, Privet and Gain on Casualty Loss
On April 30, 2015, the Company's fiberglass tank fabrication facilityUPG were able to cumulate their group-owned shares to elect 3 (of 8) new directors at the Palmer complex in Andrews, Texas suffered fire damage including minor structural damage as well as damage to the electrical system and overhead cranes. The Company completed repairs to the facility and the losses were fully insured including business interruption coverage. Total business interruption insurance recoveries recognized duringAnnual Meeting.
During the year ended December 31, 2015 were $1,246,024 and is shown separately in operating income on the accompanying consolidated statements of operations. During the fourth quarter of 2015,2020, total costs incurred by the Company completedrelating to the insurance claim settlement forproxy contest were $3.1 million.
Note 18: Subsequent Events
As discussed in Note 6, on January 15, 2021, the fireCompany and recordedits subsidiaries entered into a casualty insurance gainnew 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 $923,470, representingborrowing capacity. The Facility refinances and replaces the excessCompany's previous $100.0 million asset based revolving line of insurance proceeds overcredit with Truist Bank, which was scheduled to mature on December 21, 2021, and the net book valueremaining portion of assets damaged in the loss, and is shown separately in other incomeCompany's five-year $20 million term loan with Truist, which was scheduled to mature on February 1, 2024. The initial borrowing capacity under the accompanying consolidated statements of operations forFacility totals $110.0 million. On February 10, 2021, the year ended December 31, 2015.
Management's Annual Report on Internal Control Over Financial Reporting
ManagementCompensation Committee approved stock grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)where 15,181 shares with a market price of $8.575 per share were granted under the Securities and Exchange ActPlan. The stock awards vest in 20 percent increments annually on a cumulative basis, beginning one year after the date of 1934.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's internal control over financial reportingCompany 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 designednot entitled to provide reasonable assurance regarding the reliability of financial reportingany voting rights with respect to any shares not yet vested, and the preparationshares are not transferable. The grants are contingent upon shareholder approval of financial statements for external purposes in accordance with accounting principles generally acceptedan increase in the United Statesnumber of America. Management has excluded the Munhall facility's operations (acquired in the MUSA Stainless acquisition) from its assessmentshares of internal control over financial reporting as of December 31, 2017 because this material acquisition closed in the first quarter of 2017. Total assets of $20.2 million and total revenue of $25.8 million associated with the Munhall facility represent approximately 15 percent and 17 percent, respectively, of the related financial statement amounts of the Metals Segment as of, and for the year ended, December 31, 2017.
Because of inherent limitations, internal control over financial reportingour common stock that may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subjectbe issued pursuant to the risk that controls may become inadequate because2015 Stock Awards Plan. Shareholders will vote on this matter at our 2021 Annual Meeting of changes in conditions, or thatShareholders.
SYNALLOY CORPORATION
Notes to Consolidated Financial Statements
On February 17, 2021, the degreeBoard of compliance withDirectors re-authorized the policies may deteriorate.
Management conducted an evaluationCompany's stock repurchase program. The previous stock repurchase program had a term of the effectiveness24 months and terminated on February 21, 2021. This stock repurchase program allows for repurchase of up to 790,383 shares of the Company's internal controloutstanding common stock over financial reporting24 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 December 31, 2017 using the criteria establishedshares that will be repurchased by the CommitteeCompany, 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 Sponsoring Organizations ofDirectors authorized the Treadway Commission in the Internal Control-Integrated Framework (COSO 2013). Based on that evaluation, management believes the Company's internal control over financial reporting was effective as of December 31, 2017.
The effectivenesspermanent closure of the Company's internal control over financial reporting asPalmer 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 December 31, 2017, has been audited by KPMG LLP, an independent registered public accounting firm, which also audited the Company's Consolidated Financial Statements for the year ended December 31, 2017. KPMG LLP's report on the Company's internal control over financial reporting is set forth below.other operating units.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company believes that its disclosure controls and procedures were operating effectively as of December 31, 2017.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of Synalloy Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and other comprehensive income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Richmond Virginia
March 13, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Synalloy Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Synalloy Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and other comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 13, 2018 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired certain assets of Marcegaglia USA, Inc. (the Munhall facility) during 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, the Munhall facility’s internal control over financial reporting associated with total assets (including amounts resulting from the purchase price allocation) of $20.2 million and total revenues of $25.8 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the Munhall facility.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Richmond, Virginia
March 13, 2018
Item 99. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A9A. 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 and Chief Accounting 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 and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of December 31, 2017.2020. 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. Management has excluded the Munhall facility's operations (acquired in the MUSA Stainless acquisition) from its assessment of internal control over financial reporting as of December 31, 2017 because this material acquisition closed in the first quarter of 2017. Total assets of $20.2 million and total revenue of $25.8 million associated with the Munhall facility represent approximately 15 percent and 17 percent, respectively, of the related financial statement amounts of the Metals Segment as of, and for the year ended, December 31, 2017.
Item 9B9B. Other Information
Not applicable.
PART III
Item 1010. Directors, Executive Officers and Corporate Governance
In accordance with General Instruction G(3), information called for by Part III, Item 10, is incorporated herein by reference from the information appearing under the caption "Proposal 1 - Election of Directors," "Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for the 20162021 Annual Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Code of Ethics.Conduct. The Company's Board of Directors has adopted a Code of EthicsConduct that applies to the Company's Chief Executive Officer, Chief Financial Officer and corporate and divisional controllers. The Code of EthicsConduct is available on the Company's website at www.synalloy.com. Any amendment to, or waiver from, this Code of EthicsConduct will be posted on the Company's website.
Audit Committee. The Company has a separately designated standing Audit Committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Anthony A. Callander, Henry L. GuySusan S. Gayner, Jeffrey Kaczka and James W. Terry.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. Anthony A. CallanderJeffrey 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 1111. 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 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Item 1212. 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 20182021 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, 20172020 about all of the Company's equity compensation plans.
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Plan Category | | 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) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (1) (c) |
| Equity compensation plans approved by security holders | | 179,531 | | | $ | 12.74 | | | — | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 179,531 | | | 12.74 | | | — | |
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Plan Category | | 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) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (1) (c) |
| Equity compensation plans approved by security holders | | 145,511 |
| | $ | 12.96 |
| | 192,984 |
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| Equity compensation plans not approved by security holders | | — |
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| Total | | 145,511 |
| | $ | 12.96 |
| | 192,984 |
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(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 $95,000,$102,000, and each director has the opportunity to elect to receive 100 percent of the retainer in restricted stock. For 2017,2020, non-employee directors received an aggregate of $287,500$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 2017, six2020, seven non-employee directors each received an aggregate of 24,20943,063 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 1313. 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 20172021 Annual Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Item 1414. Principal AccountantAccounting 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 20172021 Annual Meeting of Shareholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
PART IV
Item 1515. Exhibits, and Financial Statement Schedules
(a)The following documents are filed as a part of this report:
1.Financial Statements: The following consolidated financial statements of Synalloy Corporation are included in Part II, Item 8:
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(a) | The following documents are filed |
| December 31, 2020 and 2019 | |
1. | Financial Statements: The following consolidated financial statements |
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Consolidated Balance Sheets at December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
Notes to Consolidated Financial Statements
2.Financial Statements Schedules: The following consolidated financial statements schedule of Synalloy Corporation is included in Item 15:
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2. | Financial Statements Schedules: The following consolidated financial statements schedule of Synalloy Corporation is included in Item 15: |
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
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.
See "Exhibit Index"
Schedule II Valuation and Qualifying Accounts
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| Column A | | Column B | | Column C | | Column D | | Column E |
| Description | | Balance at Beginning of Period | | Charged to (Reduction of) Cost and Expenses | | Deductions | | Balance at End of Period |
| Year ended December 31, 2017 | | | | | | | | |
| Deducted from asset account: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 82,000 |
| | $ | 202,000 |
| | $ | (249,000 | ) | | $ | 35,000 |
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| Inventory reserves | | $ | 966,000 |
| | $ | 1,237,000 |
| | $ | (1,506,000 | ) | | $ | 697,000 |
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| Year ended December 31, 2016 | | | | | | | | |
| Deducted from asset account: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 247,000 |
| | $ | (45,000 | ) | | $ | (120,000 | ) | | $ | 82,000 |
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| Inventory reserves | | $ | 682,000 |
| | $ | 984,000 |
| | $ | (700,000 | ) | | $ | 966,000 |
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| Year ended December 31, 2015 | | | | | | | | |
| Deducted from asset account: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,115,000 |
| | $ | 104,000 |
| | $ | (972,000 | ) | (a) | $ | 247,000 |
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| Inventory reserves | | $ | 725,000 |
| | $ | 767,000 |
| | $ | (810,000 | ) | | $ | 682,000 |
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(a) Allowance for doubtful accounts deductions for 2015 includes an $801,000 payment to the former owners of Palmer. Per the Stock Purchase Agreement between the former owners of Palmer and the Company (the "SPA"), the former owners of Palmer reimbursed Synalloy for all uncollected accounts receivable after 120 days of Synalloy's ownership. Synalloy increased the allowance for doubtful accounts to reflect the $801,000 payment to offset the outstanding accounts receivable at that time. Over the next two years, Synalloy collected approximately $299,000 on these old accounts and the accounts receivable balance was reduced accordingly. The SPA did not require the reimbursement of these subsequent collections to the former owners of Palmer; however, Synalloy management, on our own recognizance during the second quarter of 2015, reimbursed the $299,000 collected on these old accounts and eliminated the outstanding receivable and allowance for doubtful accounts balances. This transaction had no effect on earnings during any period.
Index to Exhibits
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| 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"
Item 16. Form 10-K Summary
None.
Schedule II Valuation and Qualifying Accounts
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| (in thousands) | | Balance at Beginning of Period | | Charged to (Reduction of) Cost and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| Year ended December 31, 2020 | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | |
| Allowance for credit losses | | $ | 70 | | | $ | 440 | | | $ | 450 | | (a) | $ | (464) | | | $ | 496 | |
| Inventory reserves | | $ | 747 | | | $ | 271 | | | $ | 0 | | | $ | (300) | | | $ | 718 | |
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| Year ended December 31, 2019 | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | |
| Allowance for credit losses | | $ | 169 | | | $ | (171) | | | $ | 72 | | (b) | $ | 0 | | | $ | 70 | |
| Inventory reserves | | $ | 676 | | | $ | 1,767 | | | $ | 0 | | | $ | (1,696) | | | $ | 747 | |
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(a) Amount charged to retained earnings upon adoption of ASC 326 on January 1, 2020.
(b) ASTI acquired reserve on January 1, 2019.
Index to Exhibits
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| Exhibit No.
from
Item 601 of
Regulation S-K
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| | Agreement between Registrant's Specialty Pipe & Tube, Inc. subsidiary and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union Local 4564-07, dated July 1, 2014, incorporated by reference to Registrant's Form 10-K for the year ended January 3, 2015 |
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| | Purchase and Sale Agreement, dated as of September 1, 2016, by and 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 Synalloy Corporation,Registrant, incorporated by reference to Registrant's Form 10-Q for the period ended September 30, 2016 |
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| | Purchase and Sale Agreement, dated as of November 30, 2018, between Marcegaglia USA,American Stainless Tubing, Inc. (now HLM Legacy Group, Inc.) and Bristol Metals,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. |
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| 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." |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYNALLOY CORPORATION
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By /s/ Craig C. BramChristopher G. Hutter Craig C. BramChristopher G. Hutter
Interim President and Chief Executive Officer (principal executive officer) | March 13, 2018 Date
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By /s/ Dennis M. Loughran
Dennis M. Loughran
Senior Vice President and Chief Financial Officer
(principal financial officer)
| March 13, 2018
Date
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By /s/ Richard D. Sieradzki
Richard D. Sieradzki
Chief Accounting Officer
(principal accounting officer)
| March 13, 20189, 2021
Date |
Registrant
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 datedates indicated.
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By /s/ Murray H. WrightHenry L. Guy
Murray H. WrightHenry L. Guy
Chairman of the Board | March 13, 20189, 2021 Date |
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By /s/ Anthony A. CallanderSusan S. Gayner
Anthony A. CallanderSusan S. Gayner
Director | March 13, 20189, 2021 Date |
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By /s/ Jeffrey Kaczka
Jeffrey Kaczka Director | March 9, 2021 Date |
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/s/ Amy J. Michtich Amy J. Michtich Director | March 13, 20189, 2021 Date |
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By /s/ James W. Terry, Jr.Benjamin Rosenzweig
James W. Terry, Jr.Benjamin Rosenzweig
Director | March 13, 20189, 2021 Date |
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By /s/ Henry L. GuyJohn P. Schauerman
Henry L. GuyJohn P. Schauerman
Director | March 13, 20189, 2021 Date |
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By /s/ Susan S. GaynerChristopher G. Hutter
Susan S. GaynerChristopher G. Hutter
Director
| March 13, 2018
Date
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By /s/ Craig C. Bram
Craig C. Bram
Interim Chief Executive Officer and Director | March 13, 20189, 2021 Date |
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/s/ Sally M. Cunningham Sally M. Cunningham Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March 9, 2021 Date |
