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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 September 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/06eec9956c98c37bcf3972046bc39377-synl-20200930_g1.jpg
Synalloy Corporation
(Exact name of registrant as specified in its charter)
Delaware57-0426694
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4510 Cox Road,Suite 201,
Richmond,Virginia23060
(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 classTrading SymbolName of exchange on which registered
Common Stock, par value $1.00 per shareSYNLNASDAQ 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 filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging 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 November 6, 2020 was 9,108,691
1



Synalloy Corporation
Table of Contents
 
PART I. FINANCIAL INFORMATION
Item 1.
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)
 September 30, 2020December 31, 2019
Assets 
Current assets 
Cash and cash equivalents$163 $626 
Accounts receivable, net of allowance for credit losses of $237 and $70, respectively
33,132 35,074 
Inventories, net89,007 98,186 
Prepaid expenses and other current assets13,453 13,229 
Total current assets135,755 147,115 
Property, plant and equipment, net36,331 40,690 
Right-of-use assets, operating leases, net32,090 35,772 
Goodwill6,810 17,558 
Intangible assets, net12,131 15,714 
Deferred income taxes1,327  
Deferred charges, net271 348 
Total assets$224,715 $257,197 
Liabilities and Shareholders' Equity 
Current liabilities 
Accounts payable$19,514 $21,150 
Accrued expenses and other current liabilities6,718 6,037 
Current portion of long-term debt4,000 4,000 
Current portion of earn-out liability3,959 5,576 
Current portion of operating lease liabilities835 3,562 
Current portion of finance lease liabilities26 253 
Total current liabilities35,052 40,578 
Long-term debt67,343 71,554 
Long-term portion of earn-out liability994 3,578 
Deferred income taxes 790 
Long-term portion of operating lease liabilities33,000 33,723 
Long-term portion of finance lease liabilities41 336 
Other long-term liabilities92 127 
Total non-current liabilities101,470 110,108 
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 value37,664 37,407 
Retained earnings51,428 70,552 
 99,392 118,259 
Less cost of common stock in treasury - 1,191,309 and 1,257,784 shares, respectively
11,199 11,748 
Total shareholders' equity88,193 106,511 
Total liabilities and shareholders' equity$224,715 $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 September 30,Nine Months Ended September 30,
2020201920202019
Net sales$59,266 $73,640 $200,099 $237,222 
Cost of sales54,271 66,352 183,592 213,412 
Gross profit4,995 7,288 16,507 23,810 
Selling, general and administrative expense6,275 8,361 21,088 24,920 
Acquisition costs and other656 90 803 438 
Proxy contest costs207  3,105  
Earn-out adjustments(146)(1,242)(969)(1,643)
Asset impairments  6,079  
Goodwill impairment10,748  10,748  
Gain on lease modification(171) (171) 
Operating (loss) income(12,574)79 (24,176)95 
Other expense (income)
Interest expense452 944 1,703 2,977 
Change in fair value of interest rate swaps(16)21 65 145 
Other, net59 180 (1,244)(224)
Loss before income taxes(13,069)(1,066)(24,700)(2,803)
Income tax benefit(2,530)(112)(6,026)(660)
Net loss $(10,539)$(954)$(18,674)$(2,143)
Net loss per common share:
Basic$(1.16)$(0.11)$(2.06)$(0.24)
Diluted$(1.16)$(0.11)$(2.06)$(0.24)
Weighted average shares outstanding:
Basic9,105 8,995 9,079 8,969 
Dilutive effect from stock options and grants    
Diluted9,105 8,995 9,079 8,969 
See accompanying notes to condensed consolidated financial statements
4

SYNALLOY CORPORATION
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30,
 20202019
Operating activities  
Net loss$(18,674)$(2,143)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation expense5,752 5,806 
Amortization expense2,324 2,614 
Asset impairments6,079  
Goodwill impairment10,748  
Amortization of debt issuance costs129 120 
Unrealized (gain) loss on equity securities(208)282 
Deferred income taxes(2,116)(561)
Proceeds from business interruption insurance 1,040  
Loss (gain) on sale of equity securities38 (474)
Earn-out adjustments(969)(1,643)
Payments on earn-out liabilities in excess of acquisition date fair value(292)(448)
Provision for losses on accounts receivable53 (92)
Provision for losses on inventories874 1,392 
Loss on sale of property, plant and equipment237 (50)
Non-cash lease expense385 432 
Non-cash lease termination loss24  
Gain on lease modification(171) 
Change in fair value of interest rate swap65 145 
Issuance of treasury stock for director fees405 304 
Stock-based compensation expense1,036 1,760 
Changes in operating assets and liabilities:  
Accounts receivable1,438 2,779 
Inventories4,593 12,169 
Other assets and liabilities(1,902)(1,035)
Accounts payable(1,636)(909)
Accrued expenses681 (1,258)
Accrued income taxes(3,963)(1,263)
Net cash provided by operating activities5,970 17,927 
Investing activities  
Purchases of property, plant and equipment(2,824)(2,841)
Proceeds from sale of property, plant and equipment102 189 
Proceeds from sale of equity securities4,430 1,091 
Purchase of equity securities (543)
Acquisition of ASTI (21,895)
Net cash provided by (used in) investing activities1,708 (23,999)
Financing activities  
Borrowings (repayments) from line of credit(1,210)(10,630)
Borrowings from term loan 20,000 
Payments on long-term debt(3,000)(2,667)
Principal payments on finance lease obligations(101)(101)
Payments for finance lease terminations(204) 
Payments on earn-out liabilities(2,939)(2,497)
Repurchase of common stock(635) 
Payments for deferred financing costs(52) 
Net cash (used in) provided by financing activities(8,141)4,105 
Decrease in cash and cash equivalents(463)(1,967)
Cash and cash equivalents at beginning of period626 2,220 
Cash and cash equivalents at end of period$163 $253 
Supplemental disclosure
Cash paid for:
  Interest$1,573 $2,780 
  Income taxes$16 $1,174 
See accompanying notes to condensed consolidated financial statements
5

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

Three Months Ended September 30, 2020
 Common StockCapital in Excess of
Par Value
Retained EarningsCost of Common Stock in TreasuryTotal
Balance at June 30, 2020$10,300 $37,465 $61,967 $(11,675)$98,057 
Net loss— — (10,539)— (10,539)
Issuance of 50,652 shares of common stock from treasury
(71)476 405 
Stock-based compensation— 270 — — 270 
Balance at September 30, 2020$10,300 $37,664 $51,428 $(11,199)$88,193 
Nine Months Ended September 30, 2020
Common StockCapital in Excess of
Par Value
Retained EarningsCost of Common Stock in TreasuryTotal
Balance at December 31, 2019$10,300 $37,407 $70,552 $(11,748)$106,511 
Net loss— — (18,674)— (18,674)
Cumulative adjustment due to adoption of ASC 326— — (450)— (450)
Issuance of 126,092 shares of common stock from treasury
— (779)— 1,184 405 
Stock-based compensation— 1,036 — — 1,036 
Purchase of common stock— — — (635)(635)
Balance at September 30, 2020$10,300 $37,664 $51,428 $(11,199)$88,193 
See accompanying notes to condensed consolidated financial statements.
6



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

Three Months Ended September 30, 2019
 Common StockCapital in Excess of
Par Value
Retained EarningsCost of Common Stock in TreasuryTotal
Balance at June 30, 2019$10,300 $36,565 $72,399 $(12,190)$107,074 
Net loss— — (954)— (954)
Stock-based compensation— 908 — — 908 
Balance at September 30, 2019$10,300 $37,473 $71,445 $(12,190)$107,028 
Nine Months Ended September 30, 2019
Common StockCapital in Excess of
Par Value
Retained EarningsCost of Common Stock in TreasuryTotal
Balance at December 31, 2018$10,300 $36,521 $68,965 $(13,302)$102,484 
Net loss— — (2,143)— (2,143)
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— 1,760 — — 1,760 
Balance at September 30, 2019$10,300 $37,473 $71,445 $(12,190)$107,028 
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
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.
8

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
On September 30, 2020, the Company early adopted ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences as well as adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. The adoption of this standard by the Company did not have a material effect on the unaudited condensed consolidated financial statements or footnote disclosures.
Recently Issued Accounting Standards - Not Yet Adopted
Recent accounting pronouncements pending adoption, other than those stated above, are not expected to have a material impact on the Company.

Note 2: Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 - Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 - Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using model-based techniques, including option pricing models, discounted cash flow models, probability weighted models, and Monte Carlo simulations.
The Company's financial instruments include cash and cash equivalents, accounts receivable, derivative instruments, accounts payable, earn-out liabilities, a revolving line of credit, a term loan, and equity securities investments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Level 1: Equity securities
During the three and nine months ended September 30, 2020, the Company sold 494,074 and 1.2 million shares, respectively, of its equity securities investments, resulting in a realized loss of $69,375 and $37,954, respectively.
For the three months ended September 30, 2020, the Company recorded no net unrealized gains or losses on investments in equity securities. For the nine months ended September 30, 2020, the Company recorded net unrealized gains of $0.2 million on the investments in equity securities held, which is included in "Other expense (income)" on the accompanying unaudited condensed consolidated statements of operations.
The Company held no equity securities as of September 30, 2020. The fair value of equity securities held by the Company as of December 31, 2019 was $4.3 million and is included in “Prepaid expenses and other current assets” on the accompanying condensed consolidated balance sheets.
9

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 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.
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 nine months ended September 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 nine months ended September 30, 2020:
(in thousands)MUSA-StainlessMUSA-GalvanizedAmerican StainlessTotal
Balance at December 31, 2019$2,403 $1,782 $4,969 $9,154 
Earn-out payments during the period
(1,263)(488)(1,480)(3,231)
Changes in fair value during the period
(415)(38)(516)(969)
Balance at September 30, 2020$725 $1,256 $2,973 $4,954 
For the three and nine months ended September 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 September 30, 2020:
InstrumentFair Value
September 30, 2020
Principal Valuation TechniqueSignificant Unobservable InputsRangeWeighted
Average
Contingent consideration (earn-out) liabilities$4,954Probability Weighted Expected ReturnDiscount rate-5%
Timing of estimated payouts2020 - 2022-
Future revenue projections
$5.5M - 12.3M
$9.5M
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 nine months ended September 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 and goodwill.
10

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
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.
The Company evaluates goodwill for impairment annually and earlier if an event or other circumstances indicates that we may not recover the carrying value of the asset. During the third quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment existed. As a result of the goodwill impairment evaluation, it was concluded that the estimated fair value of the Welded Pipe and Tube reporting unit was below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million for the quarter ended September 30, 2020. See Note 5 - Goodwill and Intangible Assets for additional details. The Company classifies these fair value measurements as Level 3.
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 September 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)September 30, 2020December 31, 2019
Raw materials$39,843 $42,896 
Work-in-process20,780 17,616 
Finished goods29,964 38,422 
$90,587 $98,934 
Less inventory reserves$1,580 $748 
Inventories, net$89,007 $98,186 

11

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4: Property, Plant and Equipment

Property, plant and equipment consist of the following: 
(in thousands)September 30, 2020December 31, 2019
Land63 63 
Leasehold improvements2,866 1,921 
Buildings84 214 
Machinery, fixtures and equipment100,097 100,300 
Construction-in-progress2,456 2,999 
105,566 105,497 
Less accumulated depreciation and amortization69,235 64,807 
Property, plant and equipment, net36,331 40,690 

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 third quarter of 2020, the Company determined potential indicators of impairment within the Welded Pipe & Tube reporting unit included in the Metals Segment, with an associated goodwill balance of $16.2 million, existed. Continued declines in the Company's stock price, reporting unit operating losses, and continued declines in the reporting unit's net sales compared to forecast, collectively, indicated that the reporting unit had experienced a triggering event and the need to perform another quantitative interim evaluation of goodwill. As a result, the Company quantitatively evaluated the Welded Pipe & Tube reporting unit for impairment. Fair value of the reporting unit was determined using a combination of an income approach and a market-based approach with equal weighting applied to each approach. The income approach utilized the estimated discounted cash flows expected to be generated by the reporting unit's assets while the market-based approach utilized comparable company information. Determining the fair value of the reporting unit 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 below its carrying value by 9.7% resulting in a goodwill impairment charge of $10.7 million for the quarter ended September 30, 2020.

The carrying amounts of goodwill are as follows:
(in thousands)Metals SegmentChemicals Segment
Balance at December 31, 2019$16,203 $1,355 
Impairment charges(10,748) 
Balance at September 30, 2020$5,455 $1,355 
12

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

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 balance of intangible assets subject to amortization are as follows:
(in thousands)September 30, 2020December 31, 2019
Intangible assets, gross$30,866 $32,126 
Accumulated amortization of intangible assets(18,735)(16,412)
Intangible assets, net$12,131 $15,714 

Estimated amortization expense related to intangible assets for the next five years are as follows (in thousands):
Remainder of 2020$705 
20212,721 
20222,501 
20231,050 
2024952 
2025855 
Thereafter3,347 

Note 6: Long-term Debt

Long-term debt consists of the following:
(in thousands)September 30, 2020December 31, 2019
$100 million Revolving line of credit, due December 20, 2021
$58,010 $59,221 
$20 million Term loan, due February 1, 2024
$13,333 $16,333 
$71,343 $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 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%. Borrowings under the Line are limited to an amount equal to a Borrowing Base calculation that includes eligible accounts receivable and inventory. As of September 30, 2020, the Company had $7.5 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 second quarter. On July 31, 2020, the Company entered into the Third Amendment to the Third Amended and Restated Loan Agreement (the "Third Amendment") with its bank. The Third Amendment amended the definition of the fixed charge coverage ratio to include the proxy contest costs in the numerator of the ratio calculation. Additionally, on August 13, 2020, the Company entered into the Fourth Amendment to the Third Amended and Restated Loan Agreement (the "Fourth Amendment") with its bank. The Fourth Amendment amended the definition of the fixed charge
13

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
coverage ratio to include the lesser of the actual non-cash asset impairment charge related to Palmer, or $6.0 million in the numerator of the ratio calculation. The amendments are effective for the quarter ended June 30, 2020 and the directly following three quarters after June 30, 2020.
The Company notified its bank of a technical default of the fixed charge coverage ratio in its Credit Agreement at the quarter ended September 30, 2020. To address the technical default, the Company entered into an amendment to its Credit Agreement with its bank subsequent to the end of the third quarter. On October 23, 2020, the Company entered into the Fifth Amendment to the Third Amended and Restated Loan Agreement (the "Fifth Amendment") with its bank. The Fifth Amendment amended the definition of the fixed charge coverage ratio to include in the numerator (i) the calculation of losses from the suspended operations of Palmer in the amount of $1,560,000, which is effective for the quarter ended June 30, 2020 and for the directly following three quarters after June 30, 2020, (ii) the calculation of losses from the suspended operations of Palmer in the amount of $740,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020, and (iii) the extraordinary expenses related to the investigation of a whistleblower complaint in the amount of $636,000, which is effective for the quarter ended September 30, 2020 and for the directly following three quarters after September 30, 2020.
At September 30, 2020, the Company had a minimum fixed charge coverage ratio of 1.47 and a minimum tangible net worth of $67.7 million.

Note 7: Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2020 was $0.3 million and $1.0 million, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2019 was $0.9 million and $1.8 million, respectively.
Stock Options
During the three and nine months ended September 30, 2020 and September 30, 2019, no stock options were exercised by officers or employees of the Company.
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.
14

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.

Note 8: Loss Per Share

The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended
September 30,
Nine Months Ended September 30,
(in thousands, except per share data)2020201920202019
Numerator:  
Net loss(10,539)(954)(18,674)(2,143)
Denominator:  
Denominator for basic earnings per share - weighted average shares
9,105 8,995 9,079 8,969 
Effect of dilutive securities:  
Employee stock options and stock grants    
Denominator for diluted earnings per share - weighted average shares
9,105 8,995 9,079 8,969 
Net loss per share:
Basic$(1.16)$(0.11)$(2.06)$(0.24)
Diluted$(1.16)$(0.11)$(2.06)$(0.24)

15

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 nine months ended September 30, 2020, respectively. The Company had no shares of common stock that were anti-dilutive for the three and nine months ended September 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 examinations for years before 2015 or state examinations for years before 2014. During the first nine 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
September 30,
Nine Months Ended September 30,
(in thousands)2020201920202019
Income tax benefit$(2,530)$(112)$(6,026)$(660)
Effective income tax rate19.4 %10.6 %24.4 %23.6 %

The effective tax rate was 19.4% and 10.6% for the three months ended September 30, 2020 and 2019, respectively. The September 30, 2020 effective tax rate was approximately equal to the U.S. statutory rate of 21.0%. The September 30, 2019 effective tax rate was lower than the statutory rate of 21.0% due to state taxes, net of the federal benefit, and discrete tax benefits on our stock compensation plan.

The effective tax rate was 24.4% and 23.6% for the nine months ended September 30, 2020 and 2019, respectively. The September 30, 2020 effective tax rate was higher than the statutory rate of 21.0% due to discrete tax benefits over the costs associated with our public proxy contest, asset impairments at our Palmer facility, goodwill impairment over our Metals Segment 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 September 30, 2019 effective tax rate was approximately equal to the U.S. statutory tax rate of 21%.

Note 10: Leases

On September 10, 2020, Store Master Funding XII, LLC, a Delaware limited liability company (“Store”) and the Company's sale-leaseback partner, closed on a transaction pursuant to which Store sold to a third party approximately 12.5 acres of unimproved land and immaterial improvements located at Synalloy’s facility in Munhall, Pennsylvania. Synalloy subleases the Munhall facility to Bristol Metals, LLC.
As a result of the sale, on September 10, 2020, Synalloy and Store entered into a Third Amended and Restated Master Lease Agreement (the “Master Lease”) to reduce Synalloy’s rent at the Munhall facility pursuant to the terms and conditions of the Second Amended and Restated Master Lease Agreement between the parties dated January 2, 2019. The Master Lease amendment was determined to be a lease modification that qualified for a change of accounting on the existing lease and not a separate contract. Upon modification of the Master Lease Agreement, the right-of-use asset and operating lease liability were remeasured using an incremental borrowing rate determined on the date of modification. As such, the Company recognized a reduction in the right-of-use asset and operating lease liability related to the Master Lease of $3.2 million and $3.4 million, respectively, and recognized a gain on the modification of $0.2 million, which is reported within operating expenses on the unaudited condensed consolidated statement of operations.
16

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Balance Sheet Presentation
Operating and finance lease amounts included in the unaudited condensed consolidated balance sheet are as follows (in thousands):
ClassificationFinancial Statement Line ItemSeptember 30, 2020
AssetsRight-of-use assets, operating leases$32,090 
AssetsProperty, plant and equipment65 
Current liabilitiesCurrent portion of lease liabilities, operating leases835 
Current liabilitiesCurrent portion of lease liabilities, finance leases26 
Non-current liabilitiesNon-current portion of lease liabilities, operating leases33,000 
Non-current liabilitiesNon-current portion of lease liabilities, finance leases41 
Total Lease Cost
Individual components of the total lease cost incurred by the Company are as follows:
(in thousands)Three Months Ended September 30, 2020Nine Months Ended September 30, 2020
Operating lease cost$1,032 $3,101 
Finance lease cost:
Amortization of right-of-use assets9 84 
Interest on finance lease liabilities 24 
Total lease cost$1,041 $3,209 
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 September 30, 2020 are as follows:
(in thousands)OperatingFinance
Remainder of 2020$899 $9 
20213,610 22 
20223,665 15 
20233,699 15 
20243,549 8 
Thereafter47,159  
Total undiscounted minimum future lease payments62,581 69 
Imputed Interest28,746 2 
Present value of lease liabilities$33,835 $67 
17

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lease Term and Discount Rate
Weighted-average remaining lease termSeptember 30, 2020
Operating Leases15.70 years
Finance Leases2.91 years
Weighted-average discount rate
Operating Leases8.33 %
Finance Leases2.56 %
During the three and nine months ended September 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.

18

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 September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Net sales
Metals Segment$47,079 $60,121 $159,761 $195,728 
Specialty Chemicals Segment12,187 13,519 40,338 41,494 
$59,266 $73,640 $200,099 $237,222 
Operating (loss) income
Metals Segment$(11,563)$450 $(19,784)$3,125 
Specialty Chemicals Segment1,061 846 3,508 2,387 
Unallocated corporate expenses1,526 2,369 5,132 6,622 
Acquisition related costs and other656 90 803 438 
Proxy contest costs
207  3,105  
Earn-out adjustments
(146)(1,242)(969)(1,643)
Gain on lease modification(171) (171) 
Operating (loss) income(12,574)79 (24,176)95 
Interest expense452 944 1,703 2,977 
Change in fair value of interest rate swap(16)21 65 145 
Other (income) expense, net59 180 (1,244)(224)
Loss before income taxes$(13,069)$(1,066)$(24,700)$(2,803)
As of
(in thousands)September 30, 2020December 31, 2019
Identifiable assets
Metals Segment$157,974 $186,758 
Specialty Chemicals Segment25,004 25,428 
Corporate41,737 45,011 
$224,715 $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.
19

Synalloy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 estimateRevisionsFinal
Inventories$5,564 $ $5,564 
Accounts receivable3,534