Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _____ to _____

COMMISSION FILE NUMBER 0-19687
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13058888&doc=11
Synalloy Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
57-0426694
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4510 Cox Road, Suite 201, Richmond, Virginia
 
23060
(Address of principal executive offices)
 
(Zip Code)
 
(804) 822-3260
 
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, par value $1.00 per share
SYNL
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ¨
Accelerated filer x
Non-accelerated filer ¨              
Smaller reporting company x
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨  No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No x
The number of shares outstanding of the registrant's common stock as of August 9, 2019 was 8,994,850


1



Synalloy Corporation
Table of Contents
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 
 




2

Part I - Financial Information
Item 1. Financial Statements
Synalloy Corporation
Condensed Consolidated Balance Sheets

 
June 30, 2019 Unaudited
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
23,760

 
$
2,220,272

Accounts receivable, less allowance for doubtful accounts
 
 
 
    of $136,000 and $169,107, respectively
43,685,225

 
41,065,251

Inventories, net
110,416,242

 
114,201,386

Prepaid expenses and other current assets
13,298,733

 
9,983,416

Total current assets
167,423,960

 
167,470,325

Non-current assets
 
 
 
Property, plant and equipment, net of accumulated
 
 
 
    depreciation of $60,400,705 and $57,288,233 respectively
41,769,975

 
40,924,455

Right-of-use assets, operating leases, net
36,428,751

 

Goodwill
17,557,620

 
9,799,992

Intangible assets, net of accumulated amortization
 
 
 
    of $14,668,672 and $12,925,888 respectively
17,457,328

 
9,696,112

Deferred charges, net
428,037

 
507,962

Total assets
$
281,065,671

 
$
228,398,846

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
28,960,431

 
$
25,073,698

Accrued expenses and other current liabilities
13,376,472

 
12,163,686

Current portion of long-term debt
4,000,000

 

Current portion of operating lease liabilities
3,526,011

 

Current portion of finance lease liabilities
248,589

 

Total current liabilities
50,111,503

 
37,237,384

 
 
 
 
Long-term debt
81,670,402

 
76,405,458

Deferred income taxes
1,388,985

 
252,988

Long-term deferred gain, sale-leaseback

 
5,599,077

Long-term portion of earn-out liability
6,060,435

 
4,702,562

Long-term portion of operating lease liabilities
34,139,854

 

Long-term portion of finance lease liabilities
457,933

 

Other long-term liabilities
162,475

 
1,717,291

Total non-current liabilities
123,880,084

 
88,677,376

Commitments and contingencies – See Note 11

 

 
 
 
 
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
36,565,297

 
36,520,840

Retained earnings
72,398,650

 
68,965,410

 
119,263,947

 
115,786,250

Less cost of common stock in treasury: 1,305,149 and 1,424,279 shares, respectively
12,189,863

 
13,302,164

Total shareholders' equity
107,074,084

 
102,484,086

Total liabilities and shareholders' equity
$
281,065,671

 
$
228,398,846

Note: The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date. See accompanying notes to condensed consolidated financial statements.

3

Synalloy Corporation
Condensed Consolidated Statements of Operations (Unaudited)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
78,777,976

 
$
71,893,763

 
$
163,581,808

 
$
130,374,365

 
 
 
 
 
 
 
 
Cost of sales
70,940,204

 
56,177,441

 
147,060,382

 
103,424,624

 
 
 
 
 
 
 
 
Gross profit
7,837,772

 
15,716,322

 
16,521,426

 
26,949,741

 
 
 
 
 
 
 
 
Selling, general and administrative expense
7,663,317

 
7,738,752

 
16,558,445

 
13,594,872

Acquisition related costs
20,073

 
690,217

 
348,021

 
690,217

Earn-out adjustments
(417,808
)
 
2,307,598

 
(401,285
)
 
2,461,658

Operating income
572,190

 
4,979,755

 
16,245

 
10,202,994

Other expense (income)
 
 
 
 
 
 
 
Interest expense
1,009,797

 
403,852

 
2,033,738

 
717,835

Change in fair value of interest rate swaps
76,533

 
(19,255
)
 
124,094

 
(92,458
)
Other, net
(109,773
)
 
(59,111
)
 
(404,441
)
 
29,185

 
 
 
 
 
 
 
 
(Loss) income before income taxes
(404,367
)
 
4,654,269

 
(1,737,146
)
 
9,548,432

Income tax (benefit) provision
(141,629
)
 
976,998

 
(547,886
)
 
2,035,998

 
 
 
 
 
 
 
 
Net (loss) income
$
(262,738
)
 
$
3,677,271

 
$
(1,189,260
)
 
$
7,512,434

 
 
 
 
 
 
 
 
Net (loss) income per common share:
 
 
 
 
 
 
 
Basic
$
(0.03
)
 
$
0.42

 
$
(0.13
)
 
$
0.86

Diluted
$
(0.03
)
 
$
0.41

 
$
(0.13
)
 
$
0.85

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
8,974,212

 
8,776,239

 
8,950,563

 
8,761,182

Dilutive effect from stock options and grants

 
87,537

 

 
72,804

Diluted
8,974,212

 
8,863,776

 
8,950,563

 
8,833,986





See accompanying notes to condensed consolidated financial statements

4



Synalloy Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)

 
Six Months Ended June 30
 
2019
 
2018
Operating activities
 
 
 
Net (loss) income
$
(1,189,260
)
 
$
7,512,434

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense
3,832,161

 
2,874,216

Amortization expense
1,742,784

 
1,147,916

Amortization of debt issuance costs
79,925

 
45,492

Deferred income taxes
(163,591
)
 
624,895

Earn-out adjustments
(401,285
)
 
2,461,658

Payments of earn-out liability in excess of acquisition date fair value
(436,321
)
 
(194,462
)
Provision for loss (reduction of) on accounts receivable
63,875

 
(30,000
)
Provision for losses on inventories
799,325

 
746,960

Gain on disposal of property, plant and equipment

 
(17,762
)
Amortization of deferred gain on sale-leaseback

 
(167,137
)
Straight line lease cost
288,269

 
184,344

Change in fair value of interest rate swaps
124,094

 
(92,458
)
Unrealized loss on equity securities
101,125

 
29,185

Realized gain on sale of equity securities
(474,227
)
 

Issuance of treasury stock for director fees
304,000

 
276,000

Employee stock compensation
852,758

 
416,180

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
850,072

 
(12,768,096
)
Inventories
8,549,818

 
(19,192,920
)
Accounts payable
2,486,724

 
3,100,665

Accrued expenses
(1,374,838
)
 
1,372,968

Accrued income taxes
(1,538,984
)
 
889,103

Other assets and liabilities, net
(1,271,022
)
 
(2,105,248
)
Net cash provided by (used in) operating activities
13,225,402

 
(12,886,067
)
Investing activities
 

 
 

Purchases of property, plant and equipment
(1,884,508
)
 
(3,381,925
)
Purchases of equity securities
(543,552
)
 
(336,951
)
Proceeds from sale of equity securities
1,091,644

 

Acquisition of the assets and operations of American Stainless Tubing, Inc. (see Note 9)
(21,895,409
)
 

Acquisition of the galvanized pipe and tube assets of MUSA (see Note 9)

 
(10,378,281
)
Net cash used in investing activities
(23,231,825
)
 
(14,097,157
)
Financing activities
 

 
 

Net (payments) borrowings (on) from line of credit
(9,068,390
)
 
28,020,386

Borrowing from term loan
20,000,000

 

Payments on term loan
(1,666,667
)
 

Principal payments on finance lease obligations
(109,493
)
 
(52,549
)
Payments of debt issuance costs

 
(53,146
)
Payments on earn-out liabilities
(1,345,539
)
 
(977,603
)
Proceeds from exercised stock options

 
50,380

Net cash provided by financing activities
7,809,911

 
26,987,468

(Decrease) increase in cash and cash equivalents
(2,196,512
)
 
4,244

Cash and cash equivalents at beginning of period
2,220,272

 
14,706

Cash and cash equivalents at end of period
$
23,760

 
$
18,950

 
 
 
 
Supplemental disclosure


 
 
Cash paid for:
 
 
 
  Interest
$
1,860,471

 
$
613,918

  Income taxes
$
1,165,951

 
$
471,000


See accompanying notes to condensed consolidated financial statements


5



Synalloy Corporation
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)


 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Cost of Common Stock in Treasury
 
Total
For the Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
$
10,300,000

 
$
36,304,160

 
$
72,661,388

 
$

 
$
(12,469,745
)
 
$
106,795,803

Net loss

 

 
(262,738
)
 

 

 
(262,738
)
Issuance of 29,276 shares of common stock from treasury

 
24,118

 

 

 
279,882

 
304,000

Employee stock compensation

 
237,019

 

 

 

 
237,019

Balance at June 30, 2019
$
10,300,000

 
$
36,565,297

 
$
72,398,650

 
$

 
$
(12,189,863
)
 
$
107,074,084

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
10,300,000

 
$
36,520,840

 
$
68,965,410

 
$

 
$
(13,302,164
)
 
$
102,484,086

Net loss

 

 
(1,189,260
)
 

 

 
(1,189,260
)
Cumulative adjustment due to adoption of ASC 842 (see Note 12)

 

 
4,622,500

 

 

 
4,622,500

Issuance of 118,430 shares of common stock from treasury

 
(808,301
)
 

 

 
1,112,301

 
304,000

Employee stock compensation

 
852,758

 

 

 

 
852,758

Balance at June 30, 2019
$
10,300,000

 
$
36,565,297

 
$
72,398,650

 
$

 
$
(12,189,863
)
 
$
107,074,084


See accompanying notes to condensed consolidated financial statements.


6



Synalloy Corporation
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)

 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Cost of Common Stock in Treasury
 
Total
For the Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
$
10,300,000

 
$
35,170,444

 
$
61,953,682

 
$

 
$
(13,696,336
)
 
$
93,727,790

Net income

 

 
3,677,271

 

 

 
3,677,271

Stock options exercised for 13,301 shares, net

 
105,907

 

 

 
(187,183
)
 
(81,276
)
Issuance of 31,471 shares of common stock from treasury

 
(3,429
)
 

 

 
279,429

 
276,000

Employee stock compensation

 
223,979

 

 

 

 
223,979

Balance at June 30, 2018
$
10,300,000

 
$
35,496,901

 
$
65,630,953

 
$

 
$
(13,604,090
)
 
$
97,823,764

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
10,300,000

 
$
35,193,152

 
$
58,129,383

 
$
(10,864
)
 
$
(13,911,245
)
 
$
89,700,426

Net income

 

 
7,512,434

 
$

 
$

 
7,512,434

Cumulative adjustment due to adoption of ASU 2016-01

 

 
(10,864
)
 
10,864

 
$

 

Stock options exercised for 13,301 shares, net

 
105,907

 

 

 
$
(187,183
)
 
(81,276
)
Issuance of 55,675 shares of common stock from treasury

 
(218,338
)
 

 

 
494,338

 
276,000

Employee stock compensation

 
416,180

 

 

 
 
 
416,180

Balance at June 30, 2018
$
10,300,000

 
$
35,496,901

 
$
65,630,953

 
$

 
$
(13,604,090
)
 
$
97,823,764

See accompanying notes to condensed consolidated financial statements.

7



Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

1. Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01. Operating results for the six-month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Certain prior period amounts have been reclassified to conform to the current period presentation, including changes in the fair value of the Company's earn-out liabilities from "Other Expense (Income)" to "Operating Income (Loss)" on the accompanying Condensed Consolidated Statements of Operations.

2. Recently Issued Accounting Standards
Recently Issued Accounting Standards - Adopted
In February 2016, the FASB issued ASU No. 2016-02  "Leases (Topic 842)", as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard as of January 1, 2019 on a modified retrospective basis, which does not require comparative periods to be restated. On adoption, we recognized additional operating lease liabilities of $33,115,763 based on the present value of the remaining minimum rental payments as of January 1, 2019. We additionally recognized corresponding right-of-use assets for operating leases totaling $32,171,829. On January 1, 2019, the Company also recorded cumulative-effect increases to equity and deferred tax assets totaling $4,622,500 and $1,310,850, respectively, related to a deferred gain for a sale leaseback transaction that occurred in 2016 and was being amortized into earnings under the prior accounting. The adoption of this standard did not have a material impact on the consolidated statement of operations or cash flows for the six months ended June 30, 2019. See Note 12.
Recently Issued Accounting Standards - Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820)". The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

8

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

3. Revenues
Revenues are recognized when control of the promised goods or services is transferred to our customers upon shipment, in an amount that reflects the consideration we are to in exchange for those goods or services.
The following table presents the Company's revenues, disaggregated by product group. Substantially all of the Company's revenues are derived from contracts with customers where performance obligations are satisfied at a point-in-time.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Storage tank and vessel
$
10,247,078

 
$
9,071,649

 
$
20,076,033

 
$
14,847,421

Seamless carbon steel pipe and tube
6,702,781

 
8,403,288

 
15,289,286

 
16,835,901

Stainless steel pipe
41,309,945

 
38,899,542

 
87,305,328

 
70,183,404

Galvanized pipe
6,243,569

 

 
12,935,805

 

Specialty chemicals
14,274,603

 
15,519,284

 
27,975,356

 
28,507,639

Total revenues
$
78,777,976

 
$
71,893,763

 
$
163,581,808

 
$
130,374,365


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

Deferred Revenues
Deferred revenues are recorded when cash payments are received in advance of satisfying the performance obligation, including amounts which are refundable. The deferred revenue balance increased $48,948 during the first six months of 2019 to $226,466 as of June 30, 2019 due to receiving $1,355,219 in advance of satisfying our performance obligations during the period, offset by $1,306,271 of revenue that was recognized during the period after satisfying the performance obligations that were included in the beginning deferred revenue balance or entered into during the current period. Deferred revenues are included in "Accrued expenses and other current liabilities" on the accompanying Condensed Consolidated Balance Sheets.

Our payment terms vary by the financial strength or location of our customer and the products offered. The length of time between invoicing and when payment is due is not significant. For certain customers, payment is required before the products or services are delivered to the customer.

4. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by either specific identification or weighted average methods. The components of inventories are as follows:
 
June 30, 2019
 
December 31, 2018
Raw materials
$
55,329,614

 
$
59,778,767

Work-in-process
17,768,751

 
21,033,532

Finished goods
37,317,877

 
33,389,087

 
$
110,416,242

 
$
114,201,386


5. Stock options and restricted stock
During the first six months of 2019, no stock options were exercised by officers or employees of the Company. During the first six months of 2018, stock options for 40,606 shares of common stock were exercised by officers or employees for an aggregate exercise price of $474,378
Stock compensation expense for the three and six-month periods ended June 30, 2019 was $237,019 and $852,758, respectively. Stock compensation expense for the three and six-month periods ended June 30, 2018 was $223,979 and $416,180, respectively.

9

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

In 2016, the Compensation & Long-Term Incentive Committee (the "Committee") of the Company's Board of Directors granted performance restricted stock awards (“2016 Performance Stock Award”) to officers and certain key management-level employees. The 2016 Performance Stock Award vested three years from the grant date based on continuous service, with the number of shares earned (0 percent to 150 percent of the target award) depending on the extent to which the Company achieves certain financial performance targets measured over the period from January 1, 2016 to December 31, 2018. On February 8, 2019, the Committee approved the vesting of the 2016 Performance Stock Award for a total of 46,477 restricted shares at a grant date market price of $8.05.
On February 8, 2019, the Committee approved grants under the Company's 2015 Stock Awards Plan to certain management employees of the Company where 44,949 shares with a market price of $15.72 per share were granted under the Plan. These stock awards vest in either 20 percent or 33 percent increments annually, beginning one year after the date of grant. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. 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 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. For the six-month period ended June 30, 2019 there is no difference in the number of shares used to calculate basic and diluted shares outstanding because their effect would have been anti-dilutive due to the Company reporting a net loss. For the six-month period ended June 30, 2018, the Company had weighted average shares of common stock, in the form of stock grants and options of 36,815 which were not included in the diluted earnings per share calculation as their effect was anti-dilutive.
6. Income Taxes
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before 2013. During the first six months of 2019, the Company did not identify nor reserve for any unrecognized tax benefits.
The effective tax rate was 35 percent and 21 percent for the three months ended June 30, 2019 and 2018, respectively. The June 30, 2019 effective tax rate is higher than the statutory rate of 21 percent due to state taxes, net of the federal benefit, and discrete tax benefits on our stock compensation plans. The June 30, 2018 effective tax rate was approximately equal to the U.S. statutory rate of 21 percent.
The effective tax rate was 32 percent and 21 percent for the six months ended June 30, 2019 and 2018, respectively. The June 30, 2019 effective tax rate is higher than the statutory rate of 21 percent due to state taxes, net of the federal benefit, and discrete tax benefits on our stock compensation plans. The June 30, 2018 effective tax rate was approximately equal t to the U.S. statutory rate of 21 percent.

10

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Segment Information

The following table summarizes certain information regarding segments of the Company's operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
Metals Segment
$
64,503,373

 
$
56,374,479

 
$
135,606,452

 
$
101,866,726

Specialty Chemicals Segment
14,274,603

 
15,519,284

 
27,975,356

 
28,507,639

 
$
78,777,976

 
$
71,893,763

 
$
163,581,808

 
$
130,374,365

Operating income (loss)
 
 
 
 
 
 
 
Metals Segment
$
1,192,644

 
$
9,090,516

 
$
2,629,285

 
$
15,107,047

Specialty Chemicals Segment
926,032

 
1,106,672

 
1,540,246

 
1,970,161

 
 
 
 
 
 
 
 
Unallocated corporate expenses
1,944,221

 
2,219,618

 
4,252,643

 
3,722,339

Acquisition related costs
20,073

 
690,217

 
301,928

 
690,217

Earn-out adjustments
(417,808
)
 
2,307,598

 
(401,285
)
 
2,461,658

Operating income
572,190

 
4,979,755

 
16,245

 
10,202,994

Interest expense
1,009,797

 
403,852

 
2,033,738

 
717,835

Change in fair value of interest rate swaps
76,533

 
(19,255
)
 
124,094

 
(92,458
)
Other (income) loss, net
(109,773
)
 
(59,111
)
 
(404,441
)
 
29,185

(Loss) income before income taxes
$
(404,367
)
 
$
4,654,269

 
$
(1,737,146
)
 
$
9,548,432

 
 
 
 
 
 
 
 
 
As of
 
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Identifiable assets
 
 
 
 
 
 
 
Metals Segment
$
208,097,980

 
$
192,195,733

 
 
 
 
Specialty Chemicals Segment
27,940,364

 
28,174,675

 
 
 
 
Corporate (1)
45,027,327

 
8,028,438

 
 
 
 
 
$
281,065,671

 
$
228,398,846

 
 
 
 
Goodwill
 
 
 
 
 
 
 
Metals Segment
$
16,202,890

 
$
8,445,262

 


 
 
Specialty Chemicals Segment
1,354,730

 
1,354,730

 
 
 
 
 
$
17,557,620

 
$
9,799,992

 
 
 
 
(1) As of June 30, 2019, this amount included 36,428,751 in right-of-use assets that were recorded with the adoption of ASC 842 ("Leases"). Refer to Note 12 for additional information. 
8. Fair Value of Financial Instruments
The Company makes estimates of fair value in accounting for certain transactions, in testing and measuring impairment and in providing disclosures of fair value in its condensed consolidated financial statements. The Company determines the fair values of its financial instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs. Fair value disclosures for assets and liabilities are grouped into three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are less active.

11

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Level 3 - Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, revolving line of credit, term loan, and equity investments.
Level 1 Financial Instruments
For short-term instruments, other than those required to be reported at fair value on a recurring basis and for which additional disclosures are included below, management concluded the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization. Therefore, as of June 30, 2019 and December 31, 2018, the carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, the Company's revolving line of credit, which is based on a variable interest rate, and term loan approximate their fair value.
During the first six months of 2019, the Company sold shares of its equity securities investments. Proceeds from the sale totaled $1,091,644 which resulted in a realized gain for the three and six-months of June 30, 2019 $148,416 and $474,227, respectively, that is included in "Other expense (income)" on the accompanying Condensed Consolidated Statements of Operations.
For the three and six-months ended June 30, 2019, the Company also recorded a net unrealized loss of $48,000 and $101,125, respectively, on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying Condensed Consolidated Statements of Operations.
The fair value of equity securities held by the Company as of June 30, 2019 and December 31, 2018 was $2,760,000 and $2,935,000, respectively, and is included in “Prepaid expenses and other current assets” on the accompanying Consolidated Balance Sheets.
Level 2 Financial Instruments
The Company has one interest rate swap contract, which is classified as a Level 2 financial instrument as it is not actively traded and is valued using pricing models that use observable market inputs. The fair value of the contract was an asset of $23,371 and $147,465 at June 30, 2019 and December 31, 2018, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in its fair value were recorded to other income (expense) with corresponding offsetting entries to current assets or liabilities, as appropriate. Significant inputs to the discounted cash flow model include projected future cash flows based on projected one-month LIBOR and the average margin for companies with similar credit ratings and similar maturities.
To manage the impact on earnings of fluctuating nickel prices, the Company occasionally enters into six-month forward option contracts, which are classified as Level 2. At June 30, 2019 and December 31, 2018, the Company did not have any such contracts in place.
Level 3 Financial Instruments
The fair value of contingent consideration ("earn-out") liabilities resulting from the 2017 MUSA-Stainless acquisition, 2018 MUSA-Galvanized acquisition, and 2019 American Stainless acquisition (see Note 9) are classified as Level 3. The fair value of the MUSA-Stainless earn-out was estimated by applying the Monte Carlo Simulation approach using management's projection of pounds to be shipped and future price per unit. The fair value of the MUSA-Galvanized earn-out and American Stainless earn-out were estimated by applying the probability-weighted expected return method, using management's projection of pounds to be shipped and future price per unit. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in the results of operations in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results.

12

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents a summary of changes in fair value of the Company's earn-out liabilities during the period:
 
MUSA-Stainless
 
MUSA-Galvanized
 
ASTI
 
Total
Balance at December 31, 2018
$
4,251,584

 
$
3,357,800

 
$

 
$
7,609,384

Fair value of the earn-out liability associated with the American Stainless acquisition

 

 
6,366,324

 
6,366,324

Earn-out payments during the period
(784,852
)
 
(378,649
)
 
(618,359
)
 
(1,781,860
)
Changes in fair value during the period
(192,065
)
 
(473,000
)
 
263,780

 
(401,285
)
Balance at June 30, 2019
$
3,274,667

 
$
2,506,151

 
$
6,011,745

 
$
11,792,563

For the six-month period ended June 30, 2018, the Company recorded a $2,461,658 charge related to changes in the fair value of the MUSA-Stainless earn-out liability.
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 in the three and six-month period ended June 30, 2019 or year ended December 31, 2018. During the first six months of 2019, there have been no changes in the fair value methodologies used by the Company.
9. Acquisitions
Acquisition of the Assets and Operations of American Stainless Tubing, Inc.
On January 1, 2019, the Company's wholly-owned subsidiary, ASTI Acquisition, LLC, a North Carolina limited liability company (“ASTI”), completed the purchase of substantially all of the assets and operations of American Stainless Tubing, Inc., a North Carolina corporation ("American Stainless"), in Statesville and Troutman, North Carolina. The purchase price for the all-cash acquisition was $21,895,409, subject to a post-closing working capital adjustment. The Company funded the acquisition with a new five-year $20,000,000 term note and a draw against asset-based line of credit (see Note 10).
The transaction is accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed. Accordingly, the allocation of the consideration transferred in the unaudited condensed consolidated financial statements is preliminary and will be adjusted upon completion of the final valuation of the assets acquired and liabilities assumed. Such adjustments could be significant. The final valuation is expected to be completed as soon as practicable but no later than twelve months after the closing date of the acquisition.
The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining American Stainless' production capabilities with the Metals Segment current operations. All of the goodwill recognized was assigned to the Company's Metals Segment and is expected to be deductible for income tax purposes.
American Stainless will receive quarterly earn-out payments for a period of three years following closing. Pursuant to the asset purchase agreement between ASTI and American Stainless, earn-out payments will equate to six and one-half percent (6.5 percent) of ASTI’s revenue over the three-year earn-out period. In determining the appropriate discount rate to apply to the contingent payments, the risk associated with the functional form of the earn-out, and the credit risk associated with the payment of the earn-out were all considered. The fair value of the contingent consideration was estimated by applying the probability weighted expected return method using management's estimates of pounds to be shipped and future price per unit.
During the second quarter of 2019, management revised the initial estimate of the fair value of the contingent consideration, resulting in an increase to the earn-out liability of $218,094. Because this adjustment was determined within the measurement period, goodwill was increased by $218,094. At June 30, 2019 the fair value of the contingent consideration totaled $6,011,745 with $2,802,828 of this liability classified as a current liability since the payments will be made quarterly.
The fair value assigned to the customer list intangible will be amortized on an accelerated basis over 15 years. During the second quarter of 2019, management revised the initial estimate of the fair value of the customer list intangible asset, resulting in a decrease

13

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

to the customer list intangible asset of $496,000. Because this adjustment was determined within the measurement period, goodwill was increased by $496,000.
The following table shows the initial estimate of value as reported at March 31, 2019 and revisions made during the second quarter of 2019:
 
Initial estimate
 
Revisions
 
Revised estimate
Inventories
$
5,564,000

 
$

 
$
5,564,000

Accounts receivable
3,533,921

 

 
3,533,921

Other current assets - production and maintenance supplies
605,613

 

 
605,613

Property, plant and equipment
2,793,173

 

 
2,793,173

Customer list intangible
10,000,000

 
(496,000
)
 
9,504,000

Goodwill
7,043,534

 
714,094

 
7,757,628

Contingent consideration (earn-out liability)
(6,148,230
)
 
(218,094
)
 
(6,366,324
)
Accounts payable
(1,400,009
)
 

 
(1,400,009
)
Other liabilities
(96,593
)
 

 
(96,593
)
 
$
21,895,409

 
$

 
$
21,895,409

ASTI's results of operations since acquisition are reflected in the Company's consolidated statements of operations as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019

 
June 30, 2019

Net sales
$
8,557,027

 
$
18,070,247

Income before income taxes
992,041

 
1,099,163


For the three and six-month periods ended June 30, 2019, cost of sales included $1,147,000 representing the fair value above predecessor cost associated with acquired inventory that was sold during the quarter.

The following unaudited pro-forma information is provided to present a summary of the combined results of the Company's operations with ASTI as if the acquisition had occurred on January 1, 2018. The unaudited pro-forma financial information is for information purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed on the date indicated above.
Pro-Forma
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018

 
June 30, 2018

Pro-forma net sales
$
81,083,582

 
$
148,090,359

Pro-forma net income
$
3,776,621

 
$
6,984,743

Earnings per share:
 
 
 
   Basic
$
0.43

 
$
0.80

   Diluted
$
0.42

 
$
0.79

Pro-forma net income was reduced for the following:
Amortization of American Stainless’ customer list intangible of $281,499 and $594,000 for the three and six months June 30, 2018, respectively;

14

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Additional rent expense related to the Company’s lease of American Stainless’ real estate from Store Capital of $121,450 and $242,899 for the three and six months ended June 30, 2018, respectively;
An estimated amount of interest expense associated with the additional borrowings to fund the American Stainless acquisition of $201,192 and $412,162 for the three and six months ended June 30, 2018, respectively;
Depreciation of $71,150 and $112,402 for the three and six months ended June 30, 2018, respectively, related to the incremental fair value above historical cost for acquired property, plant and equipment; and
A increase in the provision for income taxes for the three months ended June 30, 2018 and a decrease in the provision for income taxes of $143,013 for the six months ended June 30, 2018 related to the impact of the other pro-forma adjustments and American Stainless' previous status as a pass-through entity for income tax purposes prior to the acquisition.
Acquisition of the Galvanized Pipe and Tube Assets of Marcegaglia USA, Inc.
On July 1, 2018, Bristol Metals, LLC ("BRISMET"), a subsidiary of the Company's Metals Segment, acquired Marcegaglia USA, Inc.'s ("MUSA") galvanized tube assets and operations ("MUSA-Galvanized") located in Munhall, PA. The purchase price for the transaction totaled $10,378,281. The assets purchased and liabilities assumed from MUSA include accounts receivable, inventory, equipment, and accounts payable.

10. Long-term Debt
On December 20, 2018, the Company amended its Credit Agreement with its bank to refinance and increase its Line of Credit (the "Line") from $80,000,000 to $100,000,000 and to create a new 5-year term loan in the principal amount of $20,000,000 (the “Term Loan”). The Term Loan was used to finance the purchase of substantially all of the assets of American Stainless (see Note 9). 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 has been extended to December 20, 2021. Interest on the Line remains unchanged and is calculated using the One Month LIBOR Rate, plus 1.65 percent. Borrowings under the Line are limited to an amount equal to a Borrowing Base calculation that includes eligible accounts receivable and inventory. As of June 30, 2019, the Company had $20.0 million of remaining available capacity under its line of credit.
Pursuant to the Credit Agreement, the Company is subject to certain covenants including maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. At June 30, 2019, the Company was in compliance with all debt covenants.

11. Contingencies
The Company is from time-to-time subject to various claims, possible legal actions for product liability and other damages, and other matters arising out of the normal conduct of the Company's business.  
Management is not currently aware of any asserted or unasserted matters which could have a material effect on the financial condition or results of operations of the Company.


15

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

12. Leases
Adoption of ASC Topic 842, "Leases"
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. The Company's portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and manufacturing equipment agreements. Substantially all of the value of the Company's lease portfolio relates to a real estate master lease agreement with Store Master Funding XII, LLC, an affiliate of Store Capital Corporation ("Store") that was entered into in 2016 and amended with the 2018 MUSA-Galvanized and 2019 American Stainless acquisitions. As of June 30, 2019, operating lease liabilities related to the master lease agreement with Store totaled $37,053,119, or 97 percent of the total lease liabilities on the accompanying condensed consolidated balance sheet.
Practical Expedients and Elections
The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also elected to combine lease and non-lease components and elected the short-term lease recognition exemption for all leases that qualify.
Deferred Gain on Sale Leaseback
On January 1, 2019, the Company recorded cumulative-effect adjustments to increase equity and deferred tax assets totaling $4,622,500 and $1,310,850, respectively, related to the derecognition of the deferred gain on its sale leaseback, consistent with transition guidance set forth in ASC 842-10-65-1.
Discount Rate
To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR"). The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, treasury rates for five years, 10 years, and 30 years were used as they cover the periods of the leases. The Company additionally used the Damodaran Credit Rating Model, which assesses a credit rating based on the interest coverage ratio and relates this to credit ratings of other large public manufacturers. Inputs required include EBIT, interest expense, future minimum lease payments, outstanding debt, and a reference rate. Based on this assessment of the aforementioned qualitative and quantitative factors, the Company determined that 7.32 percent was an appropriate incremental borrowing rate to apply to its portfolio of real-estate operating leases. The Company elected to utilize a single discount rate for its portfolio of operating leases because of similar lease characteristics; the resulting calculation does not differ materially from applying the standard to the individual leases.
Weighted average discount rates for operating and finance leases are as follows:
Operating Leases
7.32
%
Finance Leases
11.88
%

16

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Balance Sheet Presentation
Operating and finance lease amounts included in the Consolidated Balance Sheet are as follows:
Financial Statement Line Item
 
Classification
 
June 30, 2019

Right-of-use assets, operating leases
 
Assets
 
$
36,428,751

Right-of-use assets, finance leases
 
Assets
 
488,347

Current lease liabilities, operating leases
 
Current liabilities
 
3,526,011

Current lease liabilities, finance leases
 
Current liabilities
 
248,589

Non-current lease liabilities, operating leases
 
Non-current liabilities
 
34,139,854

Non-current lease liabilities, finance leases
 
Non-current liabilities
 
457,933

Total Lease Cost
Individual components of the total lease cost incurred by the Company is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Operating lease cost
$
1,027,998

 
$
2,055,996

Finance lease cost:
 
 
 
Amortization of right-of-use assets
43,714

 
87,428

Interest on finance lease liabilities
22,147

 
45,864

Total lease cost
$
1,093,859

 
$
2,189,288

Amortization of 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.
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of June 30, 2019 are as follows:
 
Operating
 
Finance
2019 (excluding the six months ending June 30, 2019)
1,754,079

 
$
153,993

2020
3,562,092

 
329,534

2021
3,635,376

 
335,462

2022
3,672,731

 
11,998

2023
3,563,383

 

Thereafter
52,188,270

 

Total undiscounted minimum future lease payments
68,375,931

 
830,987

Imputed Interest
30,710,066

 
124,465

Total lease liabilities recorded as of June 30, 2019
$
37,665,865

 
$
706,522

Additional Information
Weighted average remaining lease terms for operating and finance leases as of June 30, 2019 are as follows:
Operating Leases
204 months
Finance Leases
30 months
During the six-month period ended June 30, 2019, right-of-use assets obtained in exchange for new operating lease liabilities totaled $4,900,243.

17

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

On January 1, 2019, the Company and Store, entered into an Amended and Restated Master Lease Agreement (the “Master Lease”), pursuant to which the Company leases the Statesville and Troutman, NC facilities, purchased by Store from American Stainless on January 1, 2019, for the remainder of the initial term of 20 years set forth in the Master Lease, with two renewal options of ten years each. Because the Company is reasonably certain to not exercise these renewal options, the options are not considered in determining the lease term and associated potential option payments are excluded from lease payments. The Master Lease includes a rent escalator equal to the lesser of 1.25 times the percentage increase in the Consumer Price Index since the previous increase or 2 percent.
Undiscounted future minimum lease payments under non-cancellable operating and capital leases as of December 31, 2018 accounted for under ASC 840 "Leases" were as follows:
 
Operating
 
Capital
2019
$
3,207,053

 
$
354,299

2020
3,243,694

 
329,534

2021
3,238,745

 
335,462

2022
3,224,810

 
11,998

2023
3,102,815

 

Thereafter
45,337,403

 

Total undiscounted minimum future operating lease payments


 
1,031,293

Imputed Interest


 
164,826

Total lease liabilities recorded as of December 31, 2018
 
 
$
866,467

13. Goodwill and Intangible Assets

As a result of the January 1, 2019 American Stainless acquisition, the Company recognized $7,757,628 in Goodwill for the excess of consideration transferred over the fair value of the acquired net tangible and identifiable intangible assets.

The Company also recorded a $9,504,000 intangible asset on a preliminary basis for the fair value of the customer relationships that were acquired, to be amortized on an accelerated basis over 15 years.

The balance of intangible assets subject to amortization at June 30, 2019 and December 31, 2018 is as follows:
 
June 30, 2019
 
December 31, 2018
Intangible assets, gross
$
32,126,000

 
$
22,622,000

Accumulated amortization of intangible assets
(14,668,672
)
 
(12,925,888
)
Intangible assets, net
$
17,457,328

 
$
9,696,112

Estimated amortization expense related to intangible assets for the next five years is as follows:
Remainder of 2019
$
1,776,229

2020
3,296,195

2021
3,104,819

2022
2,790,361

2023
1,245,083

2024
1,083,974

Thereafter
4,628,111


18

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

14. Stock Repurchase Program
On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding common stock over twenty-four months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.
During the six-month period ended June 30, 2019 the Company did not purchase any shares under the stock repurchase program.


19


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is management's discussion of certain significant factors that affected the Company during the second quarter and six-month periods ended June 30, 2019.
Consolidated net sales for the second quarter of 2019 were $78.8 million. This represents an increase of $6.9 million or 9.6 percent when compared to net sales for the second quarter of 2018. Excluding the net sales of ASTI and Munhall-Galvanized, net sales for the second quarter of 2019 decreased $7.9 million, or 11.0 percent compared to net sales for the second quarter of 2018.
Consolidated net sales for the first six months of 2019 were $163.6 million, an increase of $33.2 million or 25.5 percent from the first six months of 2018. Excluding the net sales of ASTI and Munhall-Galvanized, net sales for the first six months of 2019 increased $2.2 million, or 1.7 percent compared to net sales for the second quarter of 2018.
For the second quarter of 2019, the Company recorded a net loss of $0.3 million, or $0.03 loss per diluted share, compared to net income of $3.7 million, or $0.41 per diluted share for the second quarter of 2018. Excluding the financial results of ASTI and Munhall-Galvanized, net income for the second quarter of 2019 decreased $4.5 million, or 121.8 percent compared to net income for the second quarter of 2018. The second quarter of 2019 was negatively impacted by inventory price change losses which, on a pre-tax basis, totaled $1.8 million, compared to a $1.1 million gain in the second quarter of 2018.
For the first six months of 2019, net loss was $1.2 million, or $0.13 loss per diluted earnings per share. This compares to net income of $7.5 million, or $0.85 per diluted earnings per share for the first six months of 2018. Excluding the financial results of ASTI and Munhall-Galvanized, net income for the first six months of 2019 decreased $9.5 million, or 127.5 percent compared to net income for the first six months of 2018. The first six months of 2019 were negatively impacted by inventory price change losses which, on a pre-tax basis, totaled $5.2 million, compared to a $3.5 million gain for the first six months of 2018.
Impact of 2019 and 2018 Acquisitions on Financial Results
The second quarter and the first six months of 2019 include financial results in the Company's Metals Segment related to the MUSA-Galvanized acquisition (which closed on July 1, 2018) as follows:
a.
For the second quarter of 2019, net sales for Munhall-Galvanized totaled $6.2 million, with pre-tax loss of $0.2 million.
b.
For the first six months of 2019, net sales for Munhall-Galvanized totaled $12.9 million, with pre-tax income of $0.2 million.
The second quarter and the first six months of 2019 include financial results in the Company's Metals Segment related to the American Stainless acquisition (which closed on January 1, 2019) as follows:
a.
For the second quarter of 2019, net sales for ASTI totaled $8.6 million, with pre-tax income of $1.0 million.
b.
For the first six months of 2019, net sales for ASTI totaled $18.1 million, with pre-tax income of $1.1 million.
For ASTI, the first six months of 2019 include amortization of acquisition fair value markup of inventory totaling $1.3 million and other acquisition related one-time costs totaling $46,100.












20


Metals Segment
The Metals Segment's net sales for the second quarter of 2019 totaled $64.5 million, an increase of $8.1 million or 14.4 percent from the second quarter of 2018. Excluding the net sales of ASTI and Munhall-Galvanized, Metals Segment net sales for the second quarter of 2019 decreased $6.7 million, or 11.8 percent, compared to net sales for the second quarter of 2018.
Net sales for the first six months of 2019 were $135.6 million, an increase of $33.7 million or 33.1 percent from the first six months of 2018. Excluding the net sales of ASTI and Munhall-Galvanized, Metals Segment net sales for the first six months of 2019 increased $2.7 million, or 2.7 percent, compared to net sales for the first six months of 2018.
Sales of seamless carbon pipe and tube were down 20.2 percent from last year’s second quarter. Storage tank and vessel sales increased 13.0 percent over last year’s second quarter. Excluding ASTI and Munhall-Galvanized, pipe and tube sales were down 15.8 percent from the second quarter of 2018.
Sales for the second quarter and first six months of 2019 compared to the prior year are summarized as follows:
 
Sales increase (decrease) from prior year period
 
$
%
Average selling price (1)
Units
shipped
Second quarter
 
 
 
 
Storage tank and vessel
$
1,175,429

13.0%
27.7%
(14.7)%
Seamless carbon steel pipe and tube
(1,700,507
)
(20.2)%
(1.5)%
(18.7)%
Stainless steel pipe - Excluding ASTI
(6,146,625
)
(15.8)%
(13.7)%
(2.1)%
Stainless steel pipe - ASTI
8,557,027

n/a
n/a
n/a
Galvanized pipe
6,243,570

n/a
n/a
n/a
   Total second quarter change
$
8,128,894

 
 
 
 
 
 

 
First six months
 
 
 
 
Storage tank and vessel
$
5,228,612

35.2%
28.6%
6.6%
Seamless carbon steel pipe and tube
(1,546,615
)
(9.2)%
5.3%
(14.5)%
Stainless steel pipe - Excluding ASTI
(948,323
)
(1.4)%
(3.3)%
1.9%
Stainless steel pipe - ASTI
18,070,247

n/a
n/a
n/a
Galvanized pipe
12,935,805

n/a
n/a
n/a
   Total first six months change
$
33,739,726

 
 
 
(1) Average price increases for the second quarter of 2019 as compared to the second quarter of 2018 primarily relate to the following:
Storage tank and vessels - product mix change to larger, more complex tanks;
Seamless carbon steel pipe and tube - slight decline in pricing based on market conditions;
Stainless steel pipe (excluding ASTI) - pass through of input and cost changes related to:
a.Alloy surcharges decrease of two percent;
b.Base raw material input mill pricing, product mix and other competitive pricing, decrease of 11.7 percent.
For the overall Metals Segment, with the addition of the galvanized product line pricing (from the July 1, 2018 MUSA-Galvanized acquisition), pricing averages were impacted by the lower average selling prices of galvanized products as compared to other product lines in the Metals Segment. The inclusion of galvanized products lowered average pricing for the second quarter ended June 30, 2019 by 29 percent.
Average price increases for the first six months of 2019 as compared to the first six months of 2018 primarily relate to the following:
Storage tank and vessels - product mix change to larger, more complex tanks;

21


Seamless carbon steel pipe and tube - slight decline in pricing based on market conditions related to second quarter, offset by price increases related to pass through of tariffs implemented in the second quarter of 2018;
Stainless steel pipe (excluding ASTI) - pass through of input and cost changes related to:
a.Alloy surcharges decrease of one percent;
b.Base raw material input mill pricing, product mix and other competitive pricing, decrease of 2.3 percent.
For the overall Metals Segment, with the addition of the galvanized product line pricing (from the July 1, 2018 MUSA-Galvanized acquisition), pricing averages were impacted by the lower average selling prices of galvanized products as compared to other product lines in the Metals Segment. The inclusion of galvanized products lowered average pricing for the six months ended June 30, 2019 by 33 percent.
The Metals Segment's operating income decreased $7.9 million to $1.2 million for the second quarter of 2019 compared to $9.1 million for the second quarter of 2018. For the first six months of 2019, operating income decreased for the Metals Segment by $12.5 million to an operating income of $2.6 million compared to operating income of $15.1 million for the same period of 2018.
Current quarter operating results were affected by the following factors:
a)
Nickel prices and resulting surcharges for 304 and 316 alloys ended the second quarter of 2019 at continued low levels. The reduction in the nickel indices resulted in substantially lower selling prices in the second quarter, generating a net unfavorable operating impact of $1.8 million related to metal pricing. Compared to a period of rising nickel prices in the second quarter of 2018, which generated metal pricing gains of $1.1 million, the second quarter of 2019 was unfavorable by $2.9 million compared to the second quarter of 2018;
b)
Operating profits for welded stainless pipe and galvanized tube operations declined approximately $5.3 million in the second quarter of 2019 compared to the prior year period. The decline is primarily related to the average pricing declines outlined in our updated 2019 guidance issued on June 19, 2019. We are expecting some improvement in pricing and margins for galvanized as hot-dipped galvanized input cost normalizes through the remainder of the year. However, our second half projections continue to include negative pricing impacts in stainless pipe, in line with an extended period of months during which we expect to eliminate excess inventories in the market;
c)
The acquisition of American Stainless increased second quarter of 2019 operating income by $1.2 million, with no comparable results in the prior year period; and
d)
Seamless carbon pipe and tube showed a decline of 20.2 percent in sales, primarily related to reduced energy market sales of larger diameter tube, lowering operating profit by approximately $1.1 million. We do expect energy market based sales to remain low for the remainder of the year, but anticipate higher levels of special projects, specifically in the alternative energy sector.
Specialty Chemicals Segment
Net sales for the Specialty Chemicals Segment in the second quarter of 2019 totaled $14.3 million, representing a $1.2 million or 8.0 percent decrease from the second quarter of 2018. Sales for the first six months of 2019 were $28.0 million, a decrease of $0.5 million or 1.9 percent from 2018 results.
The decline of net sales belie the overall strength in Chemicals volumes sold, as pounds shipped increased by 6.5 percent and 10.5 percent for the comparisons to prior year for the second quarter and the first six months, respectively. The decline in net sales is simply a factor of more tolled product being shipped in 2019 compared to 2018, with tolled revenue not including material cost as a component.
Operating income for the Specialty Chemicals Segment for the second quarter of 2019 was $0.9 million, a decrease of $0.2 million from the same quarter of 2018. While the product mix was slightly unfavorable compared to prior year, on a sequential basis, the result represents a 51.0 percent improvement in profit over the first quarter of 2019. For the first six months of 2019, operating income for the Specialty Chemicals Segment was $1.5 million compared to operating income of $2.0 million for the same period of 2018. The prior year's first six months included a one-time claim settlement gain of $0.3 million.

22


Other Items
Unallocated corporate expenses for the second quarter of 2019 decreased $0.3 million or 12.4 percent to $1.9 million (2.5 percent of sales) compared to $2.2 million (3.1 percent of sales) for the same period in the prior year comparative period. The second quarter decrease resulted primarily from lower professional fees, employee benefits and incentive bonus expense. For the first six months of 2019, unallocated corporate expenses increased $0.5 million or 14.2 percent to $4.3 million (2.6 percent of sales) from $3.7 million (2.9 percent of sales) in the prior year comparative period. For the first six months of 2019, the increase to unallocated corporate expenses resulted primarily from higher professional fees and stock option expense.
Acquisition costs were $32,400 for the second quarter of 2019 ($12,300 recorded in Metals Segment Cost of Sales and $20,100 in unallocated SG&A), resulting from costs associated with the January 1, 2019 American Stainless acquisition. This compares to $0.7 million in acquisition cost ($0.7 million in unallocated SG&A and $31,100 in Metals Segment Cost of Sales) during the second quarter of 2018, which resulted primarily from costs associated with the Bristol Metals-Munhall galvanized acquisition.
Interest expense was $1.0 million and $0.4 million for the second quarters of 2019 and 2018, respectively. Interest expense was $2.0 million and $0.7 million for the first six months of 2019 and 2018, respectively. The increase was related to higher average debt outstanding in the second quarter and the first six months of 2019, as additional borrowings were primarily related to acquisitions and to support increased working capital requirements.
The effective tax rate was 35.0 percent and 31.5 percent for the three and six-month periods ended June 30, 2019. The June 30, 2019 effective tax rate was higher than the statutory rate of 21.0 percent due to state taxes, net of the federal benefit, and discrete tax benefits on our stock compensation plans.
The effective tax rate was 21.0 percent and 21.3 percent for the three and six-month periods ended June 30, 2018, respectively. The Company’s effective tax rate was approximately equal to the U.S. statutory rate of 21.0 percent.
The Company's cash balance decreased $2.2 million to $23,800 as of June 30, 2019 compared to $2.2 million at December 31, 2018. Fluctuations affecting cash flows during the six months ended June 30, 2019 were comprised of the following:
a)
Net inventories decreased $3.8 million at June 30, 2019 when compared to December 31, 2018, mainly due to efforts to balance inventory with projected business levels. Excluding the impact of ASTI acquired inventory, the Company generated $8.5 million of operating cash flows from the relief of inventory during the six months ended June 30, 2019. Inventory turns increased slightly from 1.81 turns at December 31, 2018, calculated on a three-month average basis, to 1.89 turns at June 30, 2019;
b)
Accounts payable increased $3.9 million as of June 30, 2019 as compared to December 31, 2018. The majority of the increase is related to levels of purchasing activity near the end of the quarter, including second quarter receipts of inventory that were still unpaid on normal terms at the end of the quarter. Accounts payable days outstanding were approximately 33 days at June 30, 2019 compared to 37 days at December 31, 2018;
c)
Net accounts receivable increased $2.6 million at June 30, 2019 as compared to December 31, 2018, which primarily resulted from the addition of ASTI’s sales and receivables following the January 1, 2019 acquisition, offset partially by a reduction in days outstanding of four days due to better collection experience at the end of the second quarter. Days sales outstanding, calculated using a six-month average basis, decreased from 52 days outstanding at the end of December 2018 to 48 days at the end of the June 2019;
d)
On January 1, 2019, the Company paid $21.9 million to complete the American Stainless acquisition;
e)
The Company purchased and sold equity securities during the six-month period ended June 30, 2019, which resulted in net cash proceeds of $0.5 million;
f)
Capital expenditures for the first six months of 2019 were $1.9 million; and
g)
The Company paid $1.8 million during the first six months of 2019 related to the earn-out liabilities from the 2019 American Stainless, 2018 MUSA-Galvanized and 2017 MUSA-Stainless acquisitions.

23


The Company increased its overall debt balance by $9.3 million during the first six months of 2019 and had $85.7 million of total borrowings outstanding with its lender as of June 30, 2019. Covenants under the Credit Agreement include maintaining a minimum fixed charge coverage ratio, maintaining a minimum tangible net worth, and a limitation on the Company’s maximum amount of capital expenditures per year, which is in line with currently projected needs. As of June 30, 2019, the Company had $20.0 million of remaining available capacity under its line of credit. The Company was in compliance with all covenants as of June 30, 2019.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This quarterly report includes and incorporates by reference "forward-looking statements" within the meaning of the federal securities laws. All statements that are not historical facts are "forward-looking statements." The words "estimate," "project," "intend," "expect," "believe," "should," "anticipate," "hope," "optimistic," "plan," "outlook," "should," "could," "may" and similar expressions identify forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, including without limitation those identified below, which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: adverse economic conditions; the impact of competitive products and pricing; product demand and acceptance risks; raw material and other increased costs; raw materials availability; employee relations; ability to maintain workforce by hiring trained employees; labor efficiencies; customer delays or difficulties in the production of products; new fracking regulations; a prolonged decrease in oil and nickel 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; 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 from time-to-time in the Company's SEC filings. The Company assumes no obligation to update the information included in this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Information about the Company's exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 18, 2019. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.
Item 4. Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company's disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's Chief Executive Officer and Chief Financial Officer concluded that that such controls and procedures, as of the end of the period covered by this quarterly report, were effective.

Changes in Internal Control over Financial Reporting
The Company's management, including the Chief Executive Officer and Chief Financial Officer, identified no change in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's control over financial reporting.


24


PART II

Item 1. Legal Proceedings
It is not unusual for us and our subsidiaries to be involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business involving, among other things, product liability, commercial, employment, workers' compensation, and environmental matters. We establish reserves in a manner that is consistent with accounting principles generally accepted in the U.S. for costs associated with such matters when a liability is probable and those costs are capable of being reasonably estimated. We cannot predict with any certainty the outcome of these unresolved legal actions or the range of possible loss or recovery. Based on current information, however, we believe that the eventual outcome of these unresolved legal actions, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows. There were no material changes in our Legal Proceedings, as discussed in Part I, Item 3 in the Company's Annual Report on Form 10-K for the period ending December 31, 2018.

Item 1A. Risk Factors
There were no material changes in our assessment of risk factors as discussed in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
None.

Item 5. Other Information
None.

Item 6. Exhibits
Exhibit No.  
 
 
 
 
Description
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
*
 
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed "furnished" and not "filed."

25


SIGNATURES

Pursuant to the requirements 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
 
(Registrant)
 
 
 
 
 
 
 
 
Date:
August 13, 2019
By:
/s/ Craig C. Bram               
 
 
 
Craig C. Bram
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
Date:
August 13, 2019
By:
/s/ Dennis M. Loughran      
 
 
 
Dennis M. Loughran
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(principal accounting officer)





26
Exhibit
Exhibit 31.1


CERTIFICATIONS

I, Craig C. Bram, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Synalloy Corporation;
 
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.  The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
August 13, 2019
/s/ Craig C. Bram
 
 
Craig C. Bram
 
 
Chief Executive Officer




Exhibit
Exhibit 31.2


CERTIFICATIONS

I, Dennis M. Loughran, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Synalloy Corporation;
 
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.  The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:
August 13, 2019
/s/ Dennis M. Loughran
 
 
Dennis M. Loughran
 
 
Chief Financial Officer



Exhibit
Exhibit 32



Certifications Pursuant to 18 U.S.C. Section 1350

The undersigned, who are the chief executive officer and the chief financial officer of Synalloy Corporation, each hereby certifies that, to the best of his knowledge, the accompanying Form 10-Q of the issuer fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Date:
August 13, 2019
/s/ Craig C. Bram
 
 
Craig C. Bram
 
 
Chief Executive Officer
 
 
 
Date:
August 13, 2019
/s/ Dennis M. Loughran
 
 
Dennis M. Loughran
 
 
Chief Financial Officer