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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _____ to _____

COMMISSION FILE NUMBER 0-19687
https://cdn.kscope.io/93975a3e54aa9da85fc131e4a9e000ab-synalloylogoa35.jpg
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 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   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes   No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes     No
The number of shares outstanding of the registrant's common stock as of September 1, 2020 was 9,058,040

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
(in thousands, except par value and share data)

 
(Unaudited)
 
 
 
June 30, 2020
 
December 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,412

 
$
626

Accounts receivable, net of allowance for credit losses of $939 and $70, respectively
36,226

 
35,074

Inventories, net
95,331

 
98,186

Prepaid expenses and other current assets
14,718

 
13,229

Total current assets
147,687

 
147,115

 
 
 
 
Property, plant and equipment, net
37,359

 
40,690

Right-of-use assets, operating leases, net
35,717

 
35,772

Goodwill
17,558

 
17,558

Intangible assets, net
12,835

 
15,714

Deferred charges, net
268

 
348

Total assets
$
251,424

 
$
257,197

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
24,844

 
$
21,150

Accrued expenses and other current liabilities
10,243

 
11,613

Current portion of long-term debt
4,000

 
4,000

Current portion of operating lease liabilities
991

 
3,562

Current portion of finance lease liabilities
31

 
253

Total current liabilities
40,109

 
40,578

 
 
 
 
Long-term debt
74,635

 
71,554

Long-term portion of earn-out liability
1,642

 
3,578

Deferred income taxes
333

 
790

Long-term portion of operating lease liabilities
36,510

 
33,723

Long-term portion of finance lease liabilities
44

 
336

Other long-term liabilities
94

 
127

Total non-current liabilities
113,258

 
110,108

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

 
10,300

Capital in excess of par value
37,465

 
37,407

Retained earnings
61,967

 
70,552

 
109,732

 
118,259

Less cost of common stock in treasury - 1,241,961 and 1,257,784 shares, respectively
11,675

 
11,748

Total shareholders' equity
98,057

 
106,511

Total liabilities and shareholders' equity
$
251,424

 
$
257,197

Note: The condensed consolidated balance sheet at December 31, 2019 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)
(in thousands, except per share data)


 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net sales
$
66,136

 
$
78,778

 
$
140,833

 
$
163,582

 
 
 
 
 
 
 
 
Cost of sales
61,775

 
70,940

 
129,321

 
147,060

 
 
 
 
 
 
 
 
Gross profit
4,361

 
7,838

 
11,512

 
16,522

 
 
 
 
 
 
 
 
Selling, general and administrative expense
7,043

 
7,663

 
14,814

 
16,558

Acquisition costs and other
6

 
20

 
135

 
348

Proxy contest costs
2,734

 

 
2,909

 

Earn-out adjustments
(827
)
 
(418
)
 
(823
)
 
(401
)
Asset impairments
6,079

 

 
6,079

 

Operating (loss) income
(10,674
)
 
573

 
(11,602
)
 
17

Other expense (income)
 
 
 
 
 
 
 
Interest expense
532

 
1,010

 
1,251

 
2,034

Change in fair value of interest rate swaps
(4
)
 
77

 
81

 
124

Other, net
(2,129
)
 
(110
)
 
(1,303
)
 
(404
)
Loss before income taxes
(9,073
)
 
(404
)
 
(11,631
)
 
(1,737
)
Income tax benefit
(2,116
)
 
(142
)
 
(3,496
)
 
(548
)
 
 
 
 
 
 
 
 
Net loss
$
(6,957
)
 
$
(262
)
 
$
(8,135
)
 
$
(1,189
)
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.77
)
 
$
(0.03
)
 
$
(0.90
)
 
$
(0.13
)
Diluted
$
(0.77
)
 
$
(0.03
)
 
$
(0.90
)
 
$
(0.13
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
9,058

 
8,974

 
9,066

 
8,951

Dilutive effect from stock options and grants

 

 

 

Diluted
9,058

 
8,974

 
9,066

 
8,951

See accompanying notes to condensed consolidated financial statements

4



SYNALLOY CORPORATION
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2020
 
2019
Operating activities
 
 
 
Net loss
$
(8,135
)
 
$
(1,189
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation expense
3,866

 
3,832

Amortization expense
1,619

 
1,743

Asset impairments
6,079

 

Amortization of debt issuance costs
80

 
80

Unrealized (gain) loss on equity securities
(208
)
 
101

Deferred income taxes
(458
)
 
(163
)
Proceeds from business interruption insurance
1,040

 

Gain on sale of equity securities
(31
)
 
(474
)
Earn-out adjustments
(823
)
 
(401
)
Payments on earn-out liabilities in excess of acquisition date fair value
(292
)
 
(436
)
Provision for losses on accounts receivable
316

 
64

Provision for losses on inventories
553

 
799

Loss on sale of property, plant and equipment
238

 

Non-cash lease expense
256

 
288

Non-cash lease termination loss
24

 

Change in fair value of interest rate swap
81

 
124

Issuance of treasury stock for director fees

 
304

Stock-based compensation expense
766

 
852

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(1,917
)
 
850

Inventories
(1,411
)
 
8,550

Other assets and liabilities
(2,225
)
 
(1,271
)
Accounts payable
3,694

 
2,486

Accrued expenses
(203
)
 
(1,375
)
Accrued income taxes
(3,082
)
 
(1,539
)
Net cash (used in) provided by operating activities
(173
)
 
13,225

Investing activities
 

 
 

Purchases of property, plant and equipment
(1,969
)
 
(1,884
)
Proceeds from sale of property, plant and equipment
100

 

Proceeds from sale of equity securities
2,667

 
1,091

Purchase of equity securities

 
(544
)
Acquisition of ASTI

 
(21,895
)
Net cash provided by (used in) investing activities
798

 
(23,232
)
Financing activities
 

 
 

Borrowings (repayments) from line of credit
5,080

 
(9,068
)
Borrowings from term loan

 
20,000

Payments on long-term debt
(2,000
)
 
(1,667
)
Principal payments on finance lease obligations
(93
)
 
(109
)
Payments for finance lease terminations
(204
)
 

Payments on earn-out liabilities
(1,987
)
 
(1,346
)
Repurchase of common stock
(635
)
 

Net cash provided by financing activities
161

 
7,810

Increase (Decrease) in cash and cash equivalents
786

 
(2,197
)
Cash and cash equivalents at beginning of period
626

 
2,220

Cash and cash equivalents at end of period
$
1,412

 
$
23

 
 
 
 
Supplemental disclosure


 
 
Cash paid for:
 
 
 
  Interest
$
1,203

 
$
1,860

  Income taxes
$
6

 
$
1,166

See accompanying notes to condensed consolidated financial statements

5



SYNALLOY CORPORATION
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
(in thousands)



 
Three Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Common Stock

Capital in Excess of
Par Value

Retained Earnings

Cost of Common Stock in Treasury

Total
Balance at March 31, 2020
$
10,300

 
$
37,035

 
$
68,924

 
$
(11,675
)
 
$
104,584

Net loss

 

 
(6,957
)
 

 
(6,957
)
Stock-based compensation

 
430

 

 

 
430

Balance at June 30, 2020
$
10,300

 
$
37,465

 
$
61,967

 
$
(11,675
)
 
$
98,057

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Cost of Common Stock in Treasury
 
Total
Balance at December 31, 2019
$
10,300

 
$
37,407

 
$
70,552

 
$
(11,748
)
 
$
106,511

Net loss

 

 
(8,135
)
 

 
(8,135
)
Cumulative adjustment due to adoption of ASC 326

 

 
(450
)
 

 
(450
)
Issuance of 75,440 shares of common stock from treasury

 
(708
)
 

 
708

 

Stock-based compensation

 
766

 

 

 
766

Purchase of common stock

 

 

 
(635
)
 
(635
)
Balance at June 30, 2020
$
10,300

 
$
37,465

 
$
61,967

 
$
(11,675
)
 
$
98,057

See accompanying notes to condensed consolidated financial statements.


6



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


 
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Cost of Common Stock in Treasury
 
Total
Balance at March 31, 2019
$
10,300

 
$
36,304

 
$
72,661

 
$
(12,470
)
 
$
106,795

Net loss

 

 
(262
)
 

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

 
24

 

 
280

 
304

Stock-based compensation

 
237

 

 

 
237

Balance at June 30, 2019
$
10,300

 
$
36,565

 
$
72,399

 
$
(12,190
)
 
$
107,074

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Capital in Excess of
Par Value
 
Retained Earnings
 
Cost of Common Stock in Treasury
 
Total
Balance at December 31, 2018
$
10,300

 
$
36,521

 
$
68,965

 
$
(13,302
)
 
$
102,484

Net loss

 

 
(1,189
)
 

 
(1,189
)
Cumulative adjustment due to adoption of ASC 842

 

 
4,623

 

 
4,623

Issuance of 118,430 shares of common stock from treasury

 
(808
)
 

 
1,112

 
304

Stock-based compensation

 
852

 

 

 
852

Balance at June 30, 2019
$
10,300

 
$
36,565

 
$
72,399

 
$
(12,190
)
 
$
107,074

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.

Note 1: Basis of Presentation

Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included as required by Regulation S-X, Rule 10-01.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Synalloy Corporation (the Company) Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.
Recently Issued Accounting Standards - Adopted
On January 1, 2020, the Company adopted ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance removes disclosure requirements pertaining to the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, the amendment clarifies that the measurement uncertainty disclosure is to communicate information about uncertainty in measurement as of the reporting date. The guidance also adds disclosure requirements for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 measurements held at the end of the reporting period as well as the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of this standard by the Company did not have a material impact on the unaudited condensed consolidated financial statements or footnote disclosures. See Note 2 for further discussion on the Company's fair value measurements.
On January 1, 2020, the Company adopted ASU No. 2017-04 Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The updated guidance eliminated step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to a reporting unit with a zero or negative carrying amount of net assets should be disclosed. The adoption of this standard by the Company did not have a material impact on the unaudited condensed consolidated financial statements.
On January 1, 2020, the Company adopted ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The updated guidance amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions, and reasonable and supportable forecasts rather than the incurred loss model which reflects losses that are probable. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company evaluated its financial instruments and determined that its trade accounts receivable are subject to the new current expected credit loss model. Based upon the application of the new current expected credit loss model, on January 1, 2020, we recorded a cumulative effect adjustment of $0.4 million to Retained Earnings. The adoption of this standard by the Company did not have a material impact on the unaudited condensed consolidated statement of operations or cash flows.
Recently Issued Accounting Standards - Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.

8

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 2: Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations..
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, a revolving line of credit, a term loan, and equity investments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Level 1: Equity securities
During the three and six months ended June 30, 2020, the Company sold 705,926 shares of its equity securities investments, resulting in a realized gain of $31,421.
For the three and six months ended June 30, 2020, the Company also recorded net unrealized gains of $1.1 million and $0.2 million, respectively, on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying unaudited condensed consolidated statements of operations.
The fair value of equity securities held by the Company as of June 30, 2020 and December 31, 2019 was $1.8 million and $4.3 million, respectively, and is included in “Prepaid expenses and other current assets” on the accompanying condensed consolidated balance sheets.
Level 2: Derivative 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 a liability of $0.1 million at June 30, 2020 and an asset of $6,088 at December 31, 2019, respectively. The interest rate swap was priced using discounted cash flow techniques. Changes in its fair value were recorded to other expense (income) with corresponding offsetting entries to "Prepaid expenses and other current assets" or "Accrued Expenses", 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.

9

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Level 3: Contingent consideration (earn-out) liabilities
The fair value of contingent consideration ("earn-out") liabilities resulting from the 2017 MUSA-Stainless acquisition, 2018 MUSA-Galvanized acquisition, and 2019 American Stainless acquisition are classified as Level 3. Each quarter-end, the Company re-evaluates its assumptions for all earn-out liabilities and adjusts to reflect the updated fair values. Changes in the estimated fair value of the earn-out liabilities are reflected in operating income in the periods in which they are identified. Changes in the fair value of the earn-out liabilities may materially impact and cause volatility in the Company's operating results. The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration (earn-out) liabilities are the discount rate, timing of the estimated payouts, and future revenue projections. Significant increases (decreases) in any of those inputs would not have resulted in a material difference in the fair value measurement of the earn-out liabilities for the three and six months ended June 30, 2020.
The following table presents a summary of changes in fair value of the Company's Level 3 earn-out liabilities measured on a recurring basis for the six months ended June 30, 2020:
(in thousands)
MUSA-Stainless
 
MUSA-Galvanized
 
American Stainless
 
Total
Balance at December 31, 2019
$
2,403

 
$
1,782

 
$
4,969

 
$
9,154

Earn-out payments during the period
(919
)
 
(352
)
 
(1,008
)
 
(2,279
)
Changes in fair value during the period
(271
)
 
74

 
(626
)
 
(823
)
Balance at June 30, 2020
$
1,213

 
$
1,504

 
$
3,335

 
$
6,052


For the three and six months ended June 30, 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 June 30, 2020:
Instrument
Fair Value
June 30, 2020
Principal Valuation Technique
Significant Unobservable Inputs
Range
Weighted
Average
Contingent consideration (earn-out) liabilities
$6,052
Probability Weighted Expected Return
Discount rate
-
5%
Timing of estimated payouts
2020 - 2022
-
Future revenue projection
$5.8M - 14.3M
$10.7M

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
During the three and six months ended June 30, 2020, the Company's only significant assets or liabilities measured at fair value on a non-recurring basis subsequent to their initial recognition were certain long-lived assets.
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.

10

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

During the quarter ended June 30, 2020, due to the continued curtailment of operations related to the COVID-19 pandemic, inventory of Palmer was written down to its net realizable value of $2.1 million and certain long-lived assets of Palmer, including tangible and intangible assets, were written down to their estimated fair value of $1.7 million, resulting in asset impairment charges of $6.1 million.
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 additional disclosures are included above, 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, 2020 and December 31, 2019, 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.

Note 3: 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:
(in thousands)
June 30, 2020
 
December 31, 2019
Raw materials
$
40,183

 
$
42,896

Work-in-process
23,481

 
17,616

Finished goods
32,945

 
38,422

 
96,609

 
98,934

Less inventory reserves
1,278

 
748

Inventories, net
$
95,331

 
$
98,186



Note 4: Property, Plant and Equipment

Property, plant and equipment consist of the following: 
(in thousands)
June 30, 2020
 
December 31, 2019
Land
$
63

 
$
63

Leasehold improvements
2,338

 
1,921

Buildings
84

 
214

Machinery, fixtures and equipment
99,220

 
100,300

Construction-in-progress
3,083

 
2,999

 
104,788

 
105,497

Less accumulated depreciation and amortization
67,429

 
64,807

Property, plant and equipment, net
$
37,359

 
$
40,690




11

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 5: Goodwill and Intangible Assets

During the second quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued deterioration in macroeconomic conditions, continued risks within the stainless steel industrial business, reporting unit operating losses and a decline in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using an income approach. Determining the fair value of the reporting unit and allocation of that fair value to individual assets and liabilities within the reporting unit to determine the implied fair value of the goodwill is judgmental in nature and requires the use of significant management estimates and assumptions. These estimates and assumptions include the discount rate, terminal growth rate, tax rate, projected capital expenditures, and overall operational forecasts, including sales growth, gross margins, and operating margins. Any changes in the judgments, estimates, or assumptions could produce significantly different results. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was greater than its carrying value by 1.7% and, as such, no goodwill impairment was necessary in the quarter ended June 30, 2020.

During the second quarter of 2020, due to the continued curtailment of operations related to the COVID-19 pandemic and managements decision to pursue a sale and exit of the Palmer business, the intangible customer list related to Palmer was written down to its estimated fair market value of zero, resulting in an impairment charge of $1.3 million, which is included in "Asset impairments" on the accompanying unaudited condensed consolidated statements of operations.

The gross carrying amounts of goodwill are as follows:
(in thousands)
June 30, 2020
 
December 31, 2019
Metals Segment
$
16,203

 
$
16,203

Specialty Chemicals Segment
1,355

 
1,355

Goodwill
$
17,558

 
$
17,558



The balance of intangible assets subject to amortization are as follows:
(in thousands)
June 30, 2020
 
December 31, 2019
Intangible assets, gross
$
30,866

 
$
32,126

Accumulated amortization of intangible assets
(18,031
)
 
(16,412
)
Intangible assets, net
$
12,835

 
$
15,714



Estimated amortization expense related to intangible assets for the next five years are as follows (in thousands):
Remainder of 2020
$
1,409

2021
2,721

2022
2,501

2023
1,050

2024
952

2025
855

Thereafter
3,347




12

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 6: Long-term Debt

Long-term debt consists of the following:
(in thousands)
June 30, 2020
 
December 31, 2019
$100 million Revolving line of credit, due December 20, 2021
$
64,302

 
$
59,221

$20 million Term loan, due January 1, 2024
14,333

 
16,333

 
$
78,635

 
$
75,554


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 13). The Term Loan’s maturity date is January 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%. 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, 2020, the Company had $7.2 million of remaining available capacity under the Line.
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 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. The amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020. 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 amendment is effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.
At June 30, 2020, the Company had a minimum fixed charge coverage ratio of 1.39 and a minimum tangible net worth of $67.4 million.

Note 7: Stock-Based Compensation
Stock-based compensation expense for the three and six months ended June 30, 2020 was $0.4 million and $0.8 million, respectively. Stock-based compensation expense for the three and six months ended June 30, 2019 was $0.2 million and $0.9 million, respectively.
Stock Options
During the three and six months ended June 30, 2020 and June 30, 2019, no stock options were exercised by officers or employees of the Company.

13

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

2011 Long-Term Incentive Stock Option Plan
On February 5, 2020 the Compensation & Long-Term Incentive Committee of the Company's Board of Directors ("Compensation Committee") approved stock option grants under the 2011 Long-Term Incentive Stock Option Plan ("the 2011 Plan"). Options for a total of 123,500 shares, with an exercise price of $12.995 per share, were granted under the 2011 Plan to certain management employees of the Company. The stock options will vest in 33 percent increments annually on a cumulative basis, beginning one year after the date of grant. In order for the options to vest, the employee must be in the continuous employment of the Company since the date of the grant. Except for death, disability, or qualifying retirement, any portion of the grant that has not vested will be forfeited upon termination of employment. The Company may terminate any portion of the grant that has not vested upon an employee's failure to comply with all conditions of the award or the 2011 Plan. 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. The per share weighted-average fair value of this stock option grant was $4.53. The Black-Scholes model for this grant was based on a risk-free interest rate of 1.66 percent, an expected life of ten years, an expected volatility of 35.1 percent and a dividend yield of 1.79 percent.

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 $7.329 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. In order for the options to vest, the employee must be in the continuous employment of the Company since the date of the grant. Except for death, disability, or qualifying retirement, any portion of the grant that has not vested will be forfeited upon termination of employment. The Company may terminate any portion of the grant that has not vested upon an employee's failure to comply with all conditions of the award or the 2011 Plan. 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. 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 ten years, an expected volatility of 38.7 percent and a dividend yield of 1.89 percent.
Restricted Stock Awards
2015 Stock Awards Plan
On February 5, 2020, the Compensation Committee approved stock grants under the Company's 2015 Stock Awards Plan (the "Plan") to certain management employees of the Company where 45,418 shares with a market price of $12.995 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. In order for the awards to vest, the employee must be in the continuous employment of the Company since the date of the award. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested upon an employee's failure to comply with all conditions of the award or the Plan. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.
Performance-Based Restricted Stock Awards
In 2017, the Compensation Committee granted performance restricted stock awards (“2017 Performance Based Incentive Award”) to officers and certain key management-level employees. The 2017 Performance Based Incentive 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 achieved certain financial performance targets measured over the period from January 1, 2017 to December 31, 2019. On February 5, 2020, the Compensation Committee approved the vesting of the 2017 Performance Based Incentive Award for a total of 28,481 restricted shares at a grant date market price of $12.30.
On February 5, 2020, the Compensation Committee approved performance-based restricted stock awards to certain management employees of the Company where 36,647 shares with a market price of $12.995 per share were granted under the Plan. 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 Adjusted EBITDA targets. The fair value of the performance-based restricted stock awards are determined based on the closing market price of our stock on the date of grant. In general, 0 percent to 150 percent 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 performance condition specified. Except for death, disability, or qualifying retirement, any portion of an award that has not vested is forfeited upon termination of employment. The Company may terminate any portion of the award that has not vested upon an employee's failure to comply with all conditions of the award. An employee is not entitled to any voting rights with respect to any shares not yet vested, and the shares are not transferable.

14

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 8: Loss Per Share

The following table sets forth the computation of basic and diluted loss per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 (in thousands, except per share data)
2020
 
2019
 
2020
 
2019
Numerator:
 
 
 
 
 
 
 
Net loss
$
(6,957
)
 
$
(262
)
 
$
(8,135
)
 
$
(1,189
)
Denominator:
 

 
 

 
 
 
 
Denominator for basic earnings per share - weighted average shares
9,058

 
8,974

 
9,066

 
8,951

Effect of dilutive securities:
 

 
 

 
 
 
 
Employee stock options and stock grants

 

 

 

Denominator for diluted earnings per share - weighted average shares
9,058

 
8,974

 
9,066

 
8,951

 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.77
)
 
$
(0.03
)
 
$
(0.90
)
 
$
(0.13
)
Diluted
$
(0.77
)
 
$
(0.03
)
 
$
(0.90
)
 
$
(0.13
)


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 0.3 million and 0.2 million shares of common stock that were anti-dilutive for the three and six months ended June 30, 2020, respectively. The Company had no shares of common stock that were anti-dilutive for the three and six months ended June 30, 2019, respectively.

Note 9: 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 or state examinations for years before 2014. During the first six months of 2020 and 2019, the Company did not identify nor reserve for any unrecognized tax benefits.

Our income tax provision and overall effective tax rates for the periods presented are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
Income tax benefit
$
(2,116
)
 
$
(142
)
 
$
(3,496
)
 
$
(548
)
Effective income tax rate
23.3
%
 
35.0
%
 
30.1
%
 
31.5
%


The three and six months ended June 30, 2020 effective tax rate were higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, additional benefits on asset impairment of our Palmer business, and benefits from our stock compensation plan. Additionally, we recognized estimated tax benefits associated with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was signed into law on March 27, 2020.  The CARES Act includes various income and payroll tax provisions, notably enabling the Company to carry back net operating losses and recover taxes paid in prior years.

The three and six months ended June 30, 2019 effective tax rates were higher than the statutory tax rate of 21% due to state taxes, net of federal benefit, and discrete benefits on our stock compensation plans.


15

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 10: Leases

Balance Sheet Presentation
Operating and finance lease amounts included in the unaudited condensed consolidated balance sheet are as follows (in thousands):
Classification
 
Financial Statement Line Item
 
June 30, 2020

Assets
 
Right-of-use assets, operating leases
 
$
35,717

Assets
 
Property, plant and equipment
 
74

Current liabilities
 
Current portion of lease liabilities, operating leases
 
991

Current liabilities
 
Current portion of lease liabilities, finance leases
 
31

Non-current liabilities
 
Non-current portion of lease liabilities, operating leases
 
36,510

Non-current liabilities
 
Non-current portion of lease liabilities, finance leases
 
44


Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
(in thousands)
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Operating lease cost
$
1,035

 
$
2,069

Finance lease cost:
 
 
 
Amortization of right-of-use assets
26

 
75

Interest on finance lease liabilities
7

 
24

Total lease cost
$
1,068

 
$
2,168


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 unaudited condensed consolidated statement of operations.
Maturity of Leases
The amounts of undiscounted future minimum lease payments under leases as of June 30, 2020 are as follows:
(in thousands)
Operating
 
Finance
Remainder of 2020
$
1,829

 
$
17

2021
3,710

 
22

2022
3,767

 
15

2023
3,803

 
15

2024
3,656

 
8

Thereafter
48,577

 

Total undiscounted minimum future lease payments
65,342

 
77

Imputed Interest
27,841

 
2

Present value of lease liabilities
$
37,501

 
$
75



16

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Lease Term and Discount Rate
Weighted-average remaining lease term
June 30, 2020

Operating Leases
15.96 years

Finance Leases
2.97 years

Weighted-average discount rate
 
Operating Leases
7.31
%
Finance Leases
2.65
%

During the three and six months ended June 30, 2020, no right-of-use assets were recognized in exchange for new operating lease liabilities.

Note 11: Commitments and 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.


17

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 12: Industry Segments

The following table summarizes certain information regarding segments of the Company's operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
Net sales
 
 
 
 
 
 
 
Metals Segment
$
52,018

 
$
64,503

 
$
112,681

 
$
135,607

Specialty Chemicals Segment
14,118

 
14,275

 
28,152

 
27,975

 
$
66,136

 
$
78,778

 
$
140,833

 
$
163,582

Operating (loss) income
 
 
 
 
 
 
 
Metals Segment
$
(9,155
)
 
$
1,193

 
$
(8,221
)
 
$
2,675

Specialty Chemicals Segment
1,980

 
926

 
2,447

 
1,540

 
 
 
 
 
 
 
 
Unallocated corporate expenses
1,586

 
1,944

 
3,607

 
4,251

Acquisition related costs and other
6

 
20

 
135

 
348

Proxy contest costs
2,734

 

 
2,909

 

Earn-out adjustments
(827
)
 
(418
)
 
(823
)
 
(401
)
Operating (loss) income
(10,674
)
 
573

 
(11,602
)
 
17

Interest expense
532

 
1,010

 
1,251

 
2,034

Change in fair value of interest rate swap
(4
)
 
77

 
81

 
124

Other (income) expense, net
(2,129
)
 
(110
)
 
(1,303
)
 
(404
)
Loss before income taxes
$
(9,073
)
 
$
(404
)
 
$
(11,631
)
 
$
(1,737
)
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
(in thousands)
June 30, 2020
 
December 31, 2019
 
 
 
 
Identifiable assets
 
 
 
 
 
 
 
Metals Segment
$
177,442

 
$
186,758

 
 
 
 
Specialty Chemicals Segment
27,039

 
25,428

 
 
 
 
Corporate
46,943

 
45,011

 
 
 
 
 
$
251,424

 
$
257,197

 
 
 
 


Note 13: 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 (now American Stainless Tubing, LLC) ("ASTI"), completed the acquisition of substantially all of the assets of American Stainless Tubing, Inc. ("American Stainless"). The purchase price for the all-cash acquisition was $21.9 million, subject to a post-closing working capital adjustment. The Company funded the acquisition with a new five-year $20 million term note and a draw against its asset-based line of credit (see Note 6).
The transaction is accounted for using the acquisition method of accounting for business combinations. Under this method, the total consideration transferred to consummate the acquisition is allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed. During the third quarter of 2019, the Company finalized the purchase price allocation for the American Stainless acquisition.
The excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets is reflected as goodwill. Goodwill consists of manufacturing cost synergies expected from combining American Stainless' production capabilities

18

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

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 identified circumstances that existed on the date of acquisition and as a result, revised the purchase price allocation of certain acquired assets and liabilities as allowable during the measurement period.
The following table shows the initial estimate of value and revisions made during 2019:
(in thousands)
Initial estimate
 
Revisions
 
Final
Inventories
$
5,564

 
$

 
$
5,564

Accounts receivable
3,534

 

 
3,534

Other current assets - production and maintenance supplies
605

 

 
605

Property, plant and equipment
2,793

 

 
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
)
 

 
(1,400
)
Other liabilities
(97
)
 

 
(97
)
 
$
21,895

 
$

 
$
21,895


ASTI's results of operations are reflected in the Company's Condensed Consolidated Statements of Operations as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
Net sales
$
7,255

 
$
8,557

 
$
14,900

 
$
18,070

Income before taxes
$
1,377

 
$
992

 
$
1,718

 
$
1,099



Note 14: Shareholders' Equity

Stock Repurchase Program
On February 21, 2019, the Board of Directors authorized a stock repurchase program for up to 850,000 shares of its outstanding common stock over 24 months. The shares will be purchased from time to time at prevailing market prices, through open market or privately negotiated transactions, depending on market conditions. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be returned to the status of authorized, but unissued shares of common stock or held in treasury. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue purchases at any time that management determines additional purchases are not warranted.
During the three months ended June 30, 2020, the Company purchased no shares under the stock repurchase program. During the six months ended June 30, 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 three and six months ended June 30, 2019, the Company purchased no shares under the stock repurchase program.
As of June 30, 2020, the Company has 790,383 shares of its share repurchase authorization remaining.


19

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)